The Hain Celestial Group, Inc.

Transcription

1 February 06, 2015 The Hain Celestial Group, Inc. Current Recommendation NEUTRAL Prior Recommendation Outperform Date of Last Change 02/06/2015 Current Price (02/05/15) $58.16 Target Price $61.00 SUMMARY DATA (HAIN-NASDAQ) SUMMARY A leader in natural food and personal care products with an array of well-known brands, Hain Celestial is poised to surge as the demand for organic food increases. The company s strategic investments coupled with continued efforts to contain costs, increase productivity and enhance cash flows and margins enabled it to deliver healthy results. This is evident from strong second-quarter fiscal 2015 results, wherein the top and bottom lines registered growth of 30.2% and 26%, respectively, on the back of rise in consumption, innovative marketing and expanded distribution. Also, acquisitions have been a key part of the company s strategy to build market share. However, management lowered its fiscal 2015 projection, taking into account foreign currency headwinds, the recall of nut butter and the fire at its Tilda manufacturing facility, thus triggering a downtrend in the Zacks Consensus Estimate. This compels us to downgrade our recommendation to Neutral. 52-Week High $ Week Low $41.53 One-Year Return (%) Beta 0.40 Average Daily Volume (sh) 1,221,860 Shares Outstanding (mil) 102 Market Capitalization ($mil) $5,915 Short Interest Ratio (days) 8.88 Institutional Ownership (%) 90 Insider Ownership (%) 5 Risk Level * Below Avg., Type of Stock Large-Growth Industry Food-Misc/Dvrsd Zacks Industry Rank * 166 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Sep) (Dec) (Mar) (Jun) (Jun) Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 22.2 Earnings Per Share (%) 29.9 Dividend (%) N/A A 455 A 456 A 463 A 1,735 A A 535 A 557 A 584 A 2,154 A A 696 A 676 E 688 E 2,691 E E 779 E 2,940 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year using TTM EPS 32.9 (Sep) (Dec) (Mar) (Jun) (Jun) 2013 $0.21 A $0.37 A $0.36 A $0.33 A $1.27 A using 2015 Estimate $0.26 A $0.43 A $0.44 A $0.45 A $1.59 A using 2016 Estimate $0.34 A $0.54 A $0.48 E $0.51 E $1.87 E Zacks Rank *: Short Term 2016 $0.40 E $0.60 E $2.16 E 1 3 months outlook 3 - Hold The quarterly figures may not add up to annuals due to rounding off Projected EPS Growth - Next 5 Years % * Definition / Disclosure on last page Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Incorporated in 1993 and headquartered in Melville, New York, The Hain Celestial Group, Inc. (HAIN) produces, distributes, markets, and sells various natural and organic foods as well as personal care products in the United States, Canada and Europe. The company offers popular better-for-you groceries (non-dairy beverages and frozen desserts, flour and baking mixes, cereals, condiments, cooking oils, infant and toddler food, etc.), snacks (potato and vegetable chips, organic tortilla style chips, whole grain chips and popcorn, etc.), and tea (include herb teas such as Lemon Zinger, Peppermint, Mandarin Orange Spice, Cinnamon Apple Spice, Red Zinger, etc.). The company s food-to-go products comprise fresh sandwiches, appetizers and full-plated meals, which are distributed to retailers, caterers, and food service providers. The Hain Celestial Group is the largest manufacturer in the natural foods segment and has several leading brands. Some of the prominent brands are Earth s Best, Ella s Kitchen, Celestial Seasonings, Terra, Garden of Eatin, Sensible Portions, The Greek Gods, Spectrum, Spectrum Essentials, Rice Dream, Soy Dream, Almond Dream, Imagine, WestSoy, Arrowhead Mills, MaraNatha, SunSpire, Health Valley, BluePrint, Lima, Danival, GG UniqueFiber TM, Yves Veggie Cuisine, Europe s Best, DeBoles, Tilda, Rudi's Organic Bakery, Linda McCartney (under license), The New Covent Garden Soup Co., Johnson s Juice Co., Farmhouse Fare, Cully & Sully, Hartley s, Sun-Pat, Gale s, Robertson s and Frank Cooper s. The company also provides natural personal care products under brands such as Avalon Organics, Alba Botanica, JASON, Queen Helene and Earth s Best brands. The products of the company are principally sold to specialty and natural food distributors and are marketed nation-wide to supermarkets, natural food stores, and other retail classes of trade including mass-market retailers, drug store chains, food service channels and club stores. The company completely acquired Hain Pure Protein Corporation (HPP), which processes, markets and distributes antibiotic-free chicken and turkey products, for $40 million. The company also has a 50% stake in a joint venture, Hutchison Hain Organic Holdings Limited ( HHO ) with Chi-Med, a majority owned subsidiary of Hutchison Whampoa Limited. Hutchison Hain Organic Holdings Limited markets and distributes the company s products in Hong Kong, China and other markets. REASONS TO BUY Strong Brand Image Driving Growth: With an extensive portfolio of well-known brands, Hain Celestial offers investors one of the strongest growth profiles in the industry. We believe that the stock is poised to surge as the economy gradually revives and demand for healthier and natural food and personal care products categories improves. Rise in consumption, innovative marketing and expanded distribution facilitated the company to post healthy sales and earnings numbers during firstquarter fiscal Net sales increased 30.2% and earnings per share registered growth of 26% year-over-year to $696.4 million and $0.54 per share, respectively. Acquisitions Playing a Key Role: Acquisitions have been a key part of the company s strategy to build market share. Acquisitions have not only expanded the company s geographical presence but have also provided opportunities to cross-sell products in the U.S., Canadian, and European markets. A healthy balance sheet enables the company to target strategic acquisition opportunities. Moreover, it is expected to result in incremental sales since it provide the company a strong foothold in the packaged food and grocery market, which is swiftly strengthening its grip. The company acquired Tilda Limited, a renowned name in Basmati rice and Rudi's Organic Bakery, one of the leading Equity Research HAIN Page 2

3 organic and gluten-free companies. The company also purchased leading packaged grocery brands Hartley's, Gale's Robertson's, Frank Cooper's and Sun-Pat from Premier Foods plc. The company also acquired Ella's Kitchen Group Limited that offers organic baby food products under approximately 80 brands and provides them in easy to carry pouches. Most recently it acquired full stake in Hain Pure Protein Corporation (HPP). Earlier it used to hold 48.7% stake in HPP. SKU Rationalization Program: Hain Celestial has undertaken a number of initiatives to improve performance and to put itself on the growth trajectory. The company s Stock Keeping Unit ( SKU ) rationalization program has helped eliminate SKUs based on lower sales volume or weak margins. Management focuses on improving profitability through new product introductions and cost containment efforts. REASONS TO SELL Trimmed FY 2015 Projection Triggers a Downtrend in the Estimate: Hain Celestial lowered its fiscal 2015 projection, taking into account foreign currency headwinds, the recall of nut butter and the fire at its Tilda manufacturing facility, thus triggering a downtrend in the Zacks Consensus Estimate. Management now anticipates net sales in the band of $2,650 $2,675 million, up 23% to 24% over fiscal Earlier, the company had projected net sales between $2,725 million and $2,800 million. Earnings per share are expected to come between $1.85 and $1.89, representing a year-over-year increase of 17% to 19%. The earnings per share growth rate range have been narrowed down from 17% to 23%. Stiff Competition May Dent Sales & Margins: Hain Celestial faces strong competition in the natural and organic foods market and the personal care products segment. Competition is encountered on several attributes - product quality, brand recognition and loyalty, price, product innovation and promotion. Big players such as Kellogg Company, Nestle, Kraft Foods, Groupe Danone, Sara Lee Corporation, Unilever, Estee Lauder, and Johnson & Johnson, who have large resources, could dent the company s sales and margins. Macroeconomic & Foreign Currency Headwinds: The company s customers remain sensitive to macroeconomic factors including interest rate hikes, increase in fuel and energy costs, credit availability, unemployment levels, and high household debt levels, which may negatively impact their disposable income triggering a shift in focus from higher priced organic products to cheaper private label brands. This may adversely affect Hain s top-line growth. Moreover, with operations in international markets, the company is highly exposed to fluctuation in exchange rates. Year-over-year currency fluctuations in the British pound, euro, and Canadian dollar, which when denominated in strong U.S. dollars, may negatively affect sales. Equity Research HAIN Page 3

4 RECENT NEWS Hain Celestial Q2 Earnings Beat Estimates, Revenues Miss February 4, 2015 The Hain Celestial Group, Inc. posted second-quarter fiscal 2015 earnings of $0.54 per share that came a penny ahead of the Zacks Consensus Estimate and surged 26% from the prior-year quarter. A diversified portfolio of organic and natural brands, rise in consumption, innovative marketing and expanded distribution, helped the company to post healthy numbers in the reported quarter. However, despite the strong bottom-line performance, the company adopted a cautious stance for its fullyear forecast. Nevertheless, on a reported basis, the company s earnings for the quarter came in at $0.43 per share, a penny above the year-ago period figure. Management stated that strong growth across domestic and United Kingdom operations helped the company to post double-digit sales growth for the 17th straight quarter. Net sales increased 30.2% to $696.4 million but missed the Zacks Consensus Estimate of $720 million. Foreign currency headwinds adversely impacted the sales during the reported quarter. However, adjusting for the recall of nut butter, sales grew 31.2% to $701.7 million. Net sales in the United States increased 8% year over year to nearly $354 million in the quarter, while net sales in the United Kingdom soared 37.5% to $200.8 million. Operations in the Rest of World segment witnessed a decline of 9.3% in net sales to $55.4 million. Hain Pure Protein Corporation ( HPPC ), which was acquired in Jul 2014, reported net sales of $86.2 million. We believe that Hain Celestial will sustain the strong momentum and is favorably poised to capitalize on the growing global demand for organic products. The company registered strong performance across all of its brands, with 20 brands reporting doubledigit year-over-year growth and 4 brands recording mid-to-high single-digit growth on a constant currency basis in the quarter. Hain Celestial s top line recorded robust contribution from brands like Sensible Portions, The Greek Gods, Terra, Garden of Eatin', Imagine, Little Bear, WestSoy, Nile Spice, Plainville Farms, Hartley's, Lima, Natumi, Frank Cooper's, Jason, Avalon Organic, Alba Botanica, Rudi's Organic Bakery, FreeBird and Plainville Farms. Gross profit rose 16.9% year over year to $167.3 million in the quarter. However, as a percentage of sales, it contracted 270 basis points to 24%. Adjusted operating income climbed 30.7% to $87.4 million in the quarter. Moreover, adjusted operating margin remained flat at 12.5%. Other Financial Details The company ended the quarter with cash and cash equivalents of $135.2 million, long-term debt (including current maturities) of $875.2 million, reflecting a debt-to-capitalization ratio of 35.1% and shareholders equity of $1,620.6 million. Cash flow from operating activities in the quarter came in at $52 million, while capital expenditures were $12.5 million. The company generated operating free cash flow of $39.2 million during the quarter. Guidance Hain Celestial lowered its fiscal 2015 projection, taking into account foreign currency headwinds, the recall of nut butter and the fire at its Tilda manufacturing facility. Management now anticipates net sales in the band of $2,650 $2,675 million, up 23% to 24% over fiscal Earlier, the company had projected net sales between $2,725 million and $2,800 million. Equity Research HAIN Page 4

5 Earnings per share are expected to come between $1.85 and $1.89, representing a year-over-year increase of 17% to 19%. Management hinted that net sales in the fourth quarter might be marginally higher than the third quarter, whereas 40% 45% of the earnings are expected to be recorded in the third quarter with the remainder in the final quarter. VALUATION The Hain Celestial Group s current trailing 12-month earnings multiple is 32.9X, compared with 22.9X industry average and 18.8X for the S&P 500. Over the last five years, Hain Celestial s shares have traded in a wide range of 14.0X to 37.9X trailing 12-month earnings. The stock is also trading at a premium based on forward earnings estimates. Our target price of $61.00, 32.6X 2015 EPS, reflects this view. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low The Hain Celestial Group, Inc. (HAIN) Industry Average S&P Pinnacle Foods Inc. (PF) Treehouse Foods, Inc. (THS) Snyder s-lance, Inc. (LNCE) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA The Hain Celestial Group, Inc. (HAIN) Industry Average S&P Equity Research HAIN Page 5

6 Earnings Surprise and Estimate Revision History Equity Research HAIN Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of HAIN. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1120 companies covered: Outperform %, Neutral %, Underperform 6.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research HAIN Page 7