Should Hain Celestial Be Your Cup of Tea?

Barron's recommended HAIN after an almost 41% decline from 2015's peak. Is it a buy now?

Author's Avatar
Apr 03, 2016
Article's Main Image

What's the best way to play a stock that's fallen sharply?

Hain Celestial has been a steady grower. Are the shares cheap enough to be enticing?

This week’s Barron’s made the case for buying natural and organic food maker Hain Celsetial Group (HAIN, Financial). The shares had come down from $70.65 at last year’s peak to under $42.

FY 2015 set a new earnings record at $1.88 per share, and FY 2016 (ends June 30, 2016) EPS appear on track to hit $2.02. I wanted to know why the stock had dropped so badly and whether it was a good buy now.

HAIN’s history provided the answers.

Back in 2010, the firm’s valuation had been relatively cheap. At that year’s low, it traded for just a 13.6x multiple, which is pretty reasonable for a growth stock. At its 2015 pinnacle, however, the stock fetched an overpriced 37.6x trailing earnings (red-starred on the chart).

The only time HAIN traded for a higher valuation was at 2012’s peak. Despite great numbers at that time, the shares then sold off by more than 29%, from $36.90 to $26.10, simply because they were too pricey (red-starred).

HAIN’s average post-recession multiple has been 23.1x. Three of the four best buying opportunties since 2010 (green-starred below) came at discounts to that level. New purchases at the early 2014 nadir of $40 at 25.1x earnings had a nice chance at trading profits when overenthusiastic traders sent the stock wild to the upside. Buy and hold types, though, have seen little net progress over the past two years based on last week’s closing price of $41.88.

02May2017172131.jpg

Projected growth of 7.5% this year and about 9.9% next make a rebound to 23 times this year’s consensus estimate appear a bit optimistic.

If the FY 2017 projection for $2.20 per share comes through, though, it could support a move back towards the $47 mark even at a P/E a bit lower than the company’s historical average.

Independent research firm Morningstar uses different methodology than I do but came to a remarkably similar conclusion. They rate HAIN with a neutral, three-stars out of five, while calling fair value as $47.

02May2017172131.jpg

Fans of the firm might find selling some out-of-the-money Nov. 18, 2016 expiration date puts as a good way to play. As of last week’s close, the $39 strike was bidding $3.00 to $3.40, while the $40 puts were showing $3.40 to $3.80 bid-ask spreads.

02May2017172132.jpg

Assume mid-range prices and the ‘if exercised’ levels for put option writers would be reduced to $35.80 and $36.40 respectively.

The best-case scenarios for either strike would be keeping 100% of all premium received up front ($320 to $360 per contract). That result is not hard to imagine considering the stock was already above even the higher of those strike prices as of trade inception.

The worst-case scenario would be forced purchase of 100 shares per contract sold at price points near the very fleeting, panic lows of the previous couple of years.

02May2017172132.jpg

Had you been ‘put’ on this same proposition this past January, you’d be sitting on fine paper gains already.

The $35.80 break-even on the $39 put sale is $6.08 per share, or 14.5%, below last week’s closing quote. Sale of the $40 puts at $3.60 would provide about a $5.48 cushion, meaning any decline of less than 13% would not cause a loss.

True believers will probably feel good owning Hain Celestial shares outright. They should do well over time. Traders seeking current income, accompanied with an extra margin of safety, might want to consider the option strategies detailed above.

Disclosure: No position in HAIN at the time of publication.