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Barron's Not Justified in Labeling Hain Celestial 'Unnaturally Good'
Posted by: Mark Lin (IP Logged)
Date: November 27, 2012 11:03AM
Barron's published an article on Nov. 24, 2012, calling Hain Celestial Group (HAIN) "unnaturally good." The article raised concerns on HAIN's higher valuation multiples relative to peers, the difficulty in evaluating HAIN's acquisition-driven growth and the sustainability of HAIN's high growth rate in the face of increased competition and private label expansion.
HAIN is a leading natural and organic food and personal care products company in North America and Europe. Hain Celestial participates in almost all natural food categories with well-known brands.
Let's examine the concerns with HAIN one at a time.
Higher Valuation Multiples Relative to Peers
Barron's stated that Hain's valuation multiples are higher than those of peers such as Danone (DANOY), General Mills (GIS) and PepsiCo (PEP).
HAIN trades at a trailing 12 months P/E of 27.7, compared with DANOY, GIS and PEP which trade at a range of P/Es between 14.8 and 19.0. HAIN is also more expensive on a EV/EBITDA basis, trading at a trailing 12 months Ev/EBITDA of 16.6. In contrast, DANOY, GIS and PEP trade around 10 to 11x EV/EBITDA.
However, the picture changes quite a bit if we include organic food peer companies like Whole Foods Market (WFM) and United Natural Foods (UNFI). HAIN appears cheaper on both P/E and EV/EBITDA, compared with WFM and UNFI. WFM and UNFI trade at P/Es of 29.1 and 38.1, respectively, and they are valued by the market at EV/EBITDAs of 13.1 and 15.5, respectively.
This is nothing new to investors. Investors are typically caught between using a smaller sample of truly "identical companies" to improve accuracy and using a larger sample of companies in the same industry with similar drivers to reduce sampling error. Neither approach is right or wrong.
Difficulty in Evaluting HAIN's Acquisition-Driven Growth
Barron's claims it is difficult to assess HAIN's acquisition-driven growth. Barron's points to the fact that HAIN's adjusted earnings are 40% higher than GAAP earnings in the five fiscal years through June 2012 and that HAIN's free cash flow ROIC averaged a modest 4% over a five-year stretch.
I will be the first to agree that it is difficult to separate the effects of organic and inorganic growth on revenue and earnings in a serial acquirer. Another alternative method is to assess HAIN's acquisitions in 2012 on a few parameters.
On the issue of acquisition financing, HAIN's acquisitions are typically done with a mixture of cash and stock, in the absence of leverage. In October 2012, HAIN completed the acquisition of Premier Foods with £170 million in cash and 836,426 shares of Hain Celestial common stock worth about £30 million at date of signing. On April 27, 2012, HAIN acquired Cully & Sully Limited for €10.5 million in cash and contingent consideration of up to €4.5 million based upon the achievement of specified operating results. On Oct. 25, 2011, HAIN acquired the Daniels Group for £146.5 million in cash and up to £13 million of contingent consideration based upon the achievement of specified operating results.
Cash and overvalued stock is preferred to debt as a form of acquisition financing. HAIN's acquisitions are typically done with a mixture of cash and stock. The use of stock to finance the Premier Foods seems justified by the sharp run-up in HAIN's stock price in 2012.
Sustainability of HAIN's High Growth Rate - Threats from Increased Competition and Private Label Expansion
Barron's throws the spotlight on private-label veggie straws at Whole Foods and Kmart; PepsiCo building a $206 million yogurt plant via a JV; and Dean Foods spinning off its WhiteWave Foods unit because of success with its Silk soy milk.
I won't comment on this directly. Instead, this reminds me of the battle between hard disk drives and solid state drives. There has been talk of solid state drives completely replacing hard disk drives for years, but this has not happened so far. This may not be the perfect example. But the point I am trying to make is that competition and substitutes are always around; the key questions are about timing and extent of impact.
The article from Barron's raises valid points, especially in relation to HAIN's acquisitions. However, concerns over competition from private labels are nothing new and the bear case for higher valuation relative to peers is not clear cut.
Stocks Discussed: HAIN, DANOY, GIS, PEP, WFM, UNFI,