Hain Celestial Is Due A Stellar But Unsurprising Quarter

Aug.15.14 | About: The Hain (HAIN)


Hain-Celestial has reliably produced solid sales growth while keeping control over costs.

Hain-Celestial's strategy involves continuous acquisition of potential competitors and related products.

Investors can likely expect another solid quarter, but investors should be wary of some structural risks.

Hain-Celestial (NASDAQ:HAIN) has consistently delivered strong results over the past decade, and there is no reason to doubt that will continue. However, its business strategy may not belong in everyone's portfolio.

HAIN's Sales Are Strong

HAIN has delivered a solid record of revenue growth and cost control over the past decade:

HAIN Revenue (<a href=

HAIN Revenue (TTM) data by YCharts

HAIN Revenue (Quarterly YoY Growth) Chart

HAIN Revenue (Quarterly YoY Growth) data by YCharts

HAIN has also demonstrated consistently capable, if perhaps unimaginative, management ability, shown through returns to capital and profit margins:

HAIN Return on Invested Capital Chart

HAIN Return on Invested Capital (TTM) data by YCharts

HAIN Gross Profit Margin Chart

HAIN Gross Profit Margin (TTM) data by YCharts

This performance is backed up by reliable cash flow from operations:

HAIN Cash from Operations Chart

HAIN Cash from Operations (TTM) data by YCharts

While HAIN does not have an enviable Cash Conversion Cycle (the time needed to convert a dollar of inventory payables into a dollar of cash), it is certainly not doing badly with regard to inventory:

HAIN Cash Conversion Cycle (Quarterly) Chart

HAIN Cash Conversion Cycle (Quarterly) data by YCharts

More importantly, there is no reason to suspect (beyond the obvious poor performance during the Great Recession) that this trend would disappear.

Overall then, HAIN has produced rapid sales growth while keeping a firm if average grip on fundamentals, costs, inventory, and operations.

HAIN Is An Enormous Conglomeration of Small Brands

HAIN management explicitly built its business around strategic acquisitions. The company controls over 50 named brands, plus countless products and trademarks. These brands all share the common theme of being comparatively healthy, organically or responsibly produced, and geared towards upper middle-class consumers in the developed world.

In the last year alone, HAIN acquired Tilda (a manufacturer of specialty rice) and Charter Baking Company (a manufacturer of organic and gluten-free snacks). These acts of conquest have been matched by an equally ruthless willingness to divest failed ideas. In February, HAIN sold Grains Noirs (a Belgian catering company) at a small loss ($2.8 million).

Notably, these purchases share another common theme beyond product nature. HAIN typically acquires small ($10s of millions) companies that could develop into potential, if minor, threats to HAIN's core business. Additionally, these purchases are routinely financed equally with stock and cash.

This strategy is borne out by HAIN's short-term asset and equity decisions. First, HAIN maintains relatively little cash on hand, and has reliably issued small amounts of common equity each year:

HAIN Cash and Equivalents (Quarterly) Chart

HAIN Cash and Equivalents (Quarterly) data by YCharts

HAIN Ordinary Shares Number (Quarterly) Chart

HAIN Ordinary Shares Number (Quarterly) data by YCharts

Overall, then, HAIN is a classic "fast second" strategic competitor. Like the House of Morgan or Proctor & Gamble, HAIN has built a 15-year record of general success (ignoring the Great Recession) around solid acquisition ideas.

HAIN's Model Has Some Structural Risks

Like any company using such plans, HAIN has some risks to consider.

First, approximately 90% of HAIN's revenue is split between the US and the UK, but HAIN maintains sales across 60 countries in the developed world. This exposes management to significant currency, tax, and political risks. However, this base also gives HAIN a relatively diverse body of revenue that can equally well insulate it from damaging shocks. Additionally, HAIN's products naturally (forgive the pun) appeal to health-conscious, upper middle class consumers in the developed world, and this market is relatively stable, if not growing.

Second, HAIN risks, like other conglomerates, losing its core focus. While management has stayed true so far to its goal of marketing natural, organic, healthy, pre-packaged, consumer foods, there is no guarantee this will continue.

Third, and perhaps most importantly, corporate "empire-building" only works when management can continue organic growth even after an acquisition. While revenues have been reliable so far, investors should watch for a rise in acquisitions paired with a decline in earnings. Investors should also keep an eye on capital expenditures and fixed-asset turnover:

HAIN Capital Expenditures Chart

HAIN Capital Expenditures (TTM) data by YCharts

HAIN notably completed another major acquisition of Hain Pure Protein (AKA Empire Chicken - a poultry producer) this quarter, in keeping with the long-term trend. Investors will have to wait and see for the results.

HAIN Is Unlikely To Deliver A Surprising Quarter

Analysts forecast $0.89 Earnings / Share, and HAIN has historically been loathe to disappoint:

Earnings / Share Actual Forecast
March 2014 $0.88 $0.86
December 2013 $0.87 $0.88
September 2013 $0.52 $0.51
June 2013 $0.65 $0.62
Click to enlarge

Ultimately, there are some serious risks to HAIN's long-term business model of unabashed conquest. However, HAIN's management has kept a lid on these concerns so far, and there is no reason to expect immediate difficulty.

If you're comfortable keeping an imperial stock in your portfolio, HAIN might be the right choice. If you're looking for organic growth in operations, rather than "organic" growth in products, you might find HAIN is a poor fit.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.