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After teaching my Value Investing Class the other night, one of my students followed up with a question about a local company: The Hain Celestial Group (HAIN).

She asked whether I thought it was a good time to buy, explaining that she had read a positive story about the company in the local newspaper. I happily responded I'd take a look for her utilizing the methods I taught in the class.

First, a look at the stock chart.

HAIN has not paid a dividend since 1994 and, judging from the chart, it would only have been a fair investment if you bought shares from 1994 - 1998. The last 10 years have been a roller coaster for shareholders, mimicking the overall stock market, more or less.

The Hain Celestial Group is in the business of manufacturing and selling natural and organic food and personal care products in the United States and internationally. HAIN is expected to have revenue of $1.01 billion in the fiscal year ending June 2010 and profit of $1.23 per share or $50 million, per the average anyalyst estimate compiled by the folks at Yahoo.

At the current market price as I write this article (17.94), the entire company (the market capitalization) is $730 million. That makes the price to earnings ratio 14.58. Analysts also expect HAIN to grow earnings over the next 5 years at 15.3% per year. That makes the price to earnings to growth (PEG) ratio a little under 1.00. That's right about where I like to see the PEG.

The current net asset value of HAIN is only $95.6 million, however. If HAIN was to shut down its business today, liquidate the assets and pay off its liabilities, what would be left for shareholders is only $95.6 million, or only $2.35 per share. It's currently selling at over 7x it's net tangible asset value! That's quite a premium. Is it worth such a premium?

Below is the worksheet I use to calculate and make a judgment on the current valuation of the business. To see if it's overvalued, fairly valued or under valued (click to enlarge).

What the worksheet attempts to do is show what you would earn in a 5-year AAA Corp. bond versus what HAIN is expected to earn in the next five years, assuming you could buy the entire company and compare the two. In this case, HAIN is expected to earn nearly 3x what you would earn in a 5-year bond (5-year bond rates are currently historically low however).

The other analysis shown from the worksheet demonstrates what the net liquidation value of HAIN would be after five years, assuming it meets its earnings expectations. In this case, the liquidation value after five years is only $435 million. A fair present value of HAIN today for such a future value would be between $269 million - $324 million. That's only about $6.62 - $7.97 per share.

This assumes that after five years HAIN would be liquidating itself. That is unlikely as I don't foresee the healthy food business becoming obsolete.

So what if HAIN meets its earnings estimates and in five years time is earning $88 million per year? What would be a fair P/E multiple to put on HAIN in five years? I would suggest asking what could be a potential earnings growth rate. My answer for best case would be 15%. This is a high estimate, but with only $1 billion in revenue in a market that seems to be gaining more and more market share as people choose healthier lifestyle choices, it's possible. That would give HAIN a future value in 5 years at $1.327 billion.

A fair present value based on a 5-year future value of $1.327 billion may be between $20 and $24 per share.

The current price is a little under $18 per share today. This would imply buying at a discount to present value, something every investor would always want to do. Buy low or buy at a discount to a fair present value.

My biggest concerns would be the following:

  • Can HAIN realistically meet the earnings growth estimates of 15%? That is quite aggressive and requires far more hours of research to better determine.
  • The balance sheet is highly leveraged. HAIN has only $41 million in cash as of the quarter ending June 2009. It also has $120 million in accounts payable and $258 million in long term debt. This is risky and gives good reason to demand a lower share price to offset this risk. In the event we enter another great depression, something I foresee having a 51% chance of happening, a few losing quarters may puts HAIN in jeopardy.

Because of my concerns, the low liquidation value and the uncertainty of the overall economy, I want to put a fair price of HAIN in between the liquidation value in five years and the potential value based on a p/e of 15 in five years. That is between about $7 and $22, so that would be $14.50 per share.

With this limited analysis, I would rate HAIN a cautious hold if already holding and a buy at $14.50 or less. If HAIN gets below $14.50, before I would commit capital, I would then invest time to do more research to give more justice to committing capital to this company.

Disclosure: No Position

Source: Hain Celestial Group: Buy, Sell or Hold?