The natural and organic foods industry is growing at a fast pace. For example, in the U.S. itself, sales of organic foods clocked a whopping $35 billion last year, increasing 11.5% year over year. This was the sector's strongest growth in five years, and 2014 is expected to get even better. The Organic Trade Association expects growth of 12% this year. The good thing is that this trend is not catching in just the U.S., but all across the world. In fact, according to Transparency Market Research, the global organic food market is estimated to grow from $57.5 billion in 2010 to $104.7 billion in 2015, clocking a CAGR of 12.9%.
There are many companies benefiting from this trend, and Hain Celestial (NASDAQ:HAIN) is one of them. As a little bit of background, Hain Celestial is involved in manufacturing organic and natural foods, offering a wide range of grocery products including infant formula, non-dairy beverages, Greek-style yogurt, cold-pressed juices, etc. The company has made the most of the organic food boom so far, reporting tremendous growth.
In fact, in the third quarter, Hain Celestial reported the largest sales during a three-month period in its 20-year history, posting year-over-year revenue growth of 22%. The company has expanded its reach into new geographies, and this will help Hain to fuel its growth in the coming years. Its presence across regions such as the U.S., the U.K., Europe, and others will allow it to profit from different end markets.
Although it has faced some challenges in the U.K.'s soup business on account of a warm weather, with the recent changes it has made in its product formulation and packaging, management is looking forward to a better performance in the future.
Driven by smart acquisitions
Acquisitions have been key to Hain's success, which have allowed it to expand its product mix in different areas. The company has added companies such as Ella's Kitchen, Tilda, Rudi's, and BluePrint to its fleet of existing brands. Management has also taken some strategic steps to minimize its low-margin business with the divestment of Grains Noirs in Europe.
Coming to its acquisitions, Tilda is a 100% branded premium basmati and specialty rice company, and with its acquisition, Hain will now have access to markets in the Middle East, North Africa, and India. According to a report, there are more than 25,000 independent ethnic stores around the world that sell ethnic products, and none of them sell Hain's products. So, this is a huge untapped market for the company. Management is now looking forward to work with local farmers to grow its distribution in India. In addition, it will leverage its infrastructure in India for raw material and quality assurance testing.
Hain's acquisition of Rudi's Organic Bakery, which is a leading certified organic bread brand, is on track to contribute strongly to its revenue. According to management, "We believe Rudi's Organic Bakery will be Hain Celestial's next $100 million brand." Rudi's has a large pipeline of innovative products, and hence, it is positioned well in both the organic and gluten-free segments.
Flexing its muscles
Moreover, the overall food market is estimated to be worth $700 billion, of which the natural segment covers only $50 billion. Management believes that it is well positioned to tap this huge potential, driven by acquisitions and new products.
As a result, Hain is testing its first farm in New York, which will supply organic foods for the BluePrint brand with parsley, cucumber, kale, red beets, romaine lettuce, and spinach. Moreover, the company will continue to upgrade its infrastructure with additional investments, as it did in the case of its Oregon facility to meet the increasing demand for MaraNatha.
Hain is also targeting the Asian market with its Hutchison Hain Organic joint venture. The performance from this segment has been strong on account of increasing demand from China, the Philippines, and Singapore. Consequently, management now is looking for avenues in Asia to build new facilities that will be able to meet demands for snacks, infant formula, and baby food.
However, Hain might face certain challenges in agriculture products. Commodity prices are very volatile, and no one can fully regulate them, which is toughest part of this segment. But, with the right measures, the losses due to cost inflation can be minimized. As a result, Hain has been focusing on delivering productivity improvements. The company is looking at increasing the efficiency of its plants, along with an increment in internal production. As a result, Hain was able to deliver more than $8 million in productivity savings in the previous quarter.
Hain has got a strong distribution network, with giant retail stores such as Kroger (NYSE:KR), Target (NYSE:TGT), Wal-Mart (NYSE:WMT) and many others carrying its products. Also, to keep up its pace of growth, Hain recently introduced 100 new products at Expo West.
The bottom line is that Hain Celestial seems to be making the right moves in a fast-growing market. With earnings expected to improve at a CAGR of 16.6% over the next five years and the stock trading at a forward P/E of 23, it might be a good idea to invest in Hain Celestial looking at its long-term prospects.
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