Hain Celestial - Don't Confuse A Great Company With A Great Investment

Aug.21.14 | About: The Hain (HAIN)

Summary

Hain Celestial ended its fiscal 2014 on a strong note.

As it sees another strong year of 2015 coming up.

While operational performance is excellent, I remain cautious on valuation concerns.

Hain Celestial (NASDAQ:HAIN) ended its fiscal year on a strong foot, posting accelerated revenue growth and guiding for a strong fiscal year of 2015.

While I like the organic growth of the business, I am cautious given the premium valuation, the built up in leverage and the steady dilution of the shareholder base. As such I remain very cautious on the prospects for the shares despite the excellent operational results after multi-year momentum.

A Strong End To The Quarter

Hain Celestial reported fourth quarter sales of $583.8 million which represented a 26.0% increase compared to last year. Revenues came in slightly above consensus estimates at $578.3 million.

Reported net earnings rose by 37.8% to $35.7 million. While the company faced a bit of dilution of the share base of over the past year, earnings per diluted share were up by 32.1% to $0.70 per share.

Adjusted earnings, which are a non-GAAP earnings metric, came in at $0.90 per share. This was a penny better compared to consensus estimates.

Looking Into The Quality Of The Results

Reported sales growth was very impressive indeed driven by the company's UK operations at which revenues rose by 65.5% to $200.5 million. This in its turn was of course driven by acquisitions made by the company although Hain did not provide comparable sales growth numbers in the earnings release. The main US operations posted a 13.2% increase in sales to $323.0 million while sales in the rest of the world totaled just $60.4 million.

Overall the company managed to show solid margins growth on top of the reported sales growth. Overall gross margins were actually down by 40 basis points to 26.1% of sales, yet the company managed to cut operating spending quite a bit amidst a fall in acquisition related expenses among others.

As such operating margins rose by 170 basis points to 10.3% of sales. It should be noted that US operations are substantially more profitable compared to the operations in the UK and the rest of the world, resulting in potential opportunities for margin expansion.

Solid 2015 Outlook

For the upcoming fiscal year of 2015, Hain Celestial anticipates sales of $2.72 to $2.80 billion which would represent a 27-30% annual growth rate in sales. This includes the contribution from the acquired Pure Protein Company, as announced in July, adding some $230 million in anticipated sales.

That deal will increase earnings by about $0.03-$0.05 per share. As such next year's earnings are foreseen between $3.72 and $3.90 per share on a diluted basis which represents 17-20% growth compared to 2014's non-GAAP earnings of $3.17 per share.

Note that this earnings guidance is a non-GAAP accounting measure, with GAAP earnings in 2014 totaling about 88% of reported adjusted earnings.

While the revenue outlook is rather favorable compared to consensus estimates which stood at $2.51 billion this might be the result of analysts not factoring in the $230 million in sales from the Pure Protein Company. Adding those sales back in and revenues are largely in line with the company's forecast. The earnings outlook is rather strong versus consensus estimates for earnings of $3.73 per share on a non-GAAP basis.

Valuation

Hain Celestial held some $124 million in cash and equivalents by the end of the year, yet its total debt position has increased to $868 million following the latest deals, resulting in a net debt position of close to $750 million.

This results in a 2.5 times leverage ratio based on adjusted EBITDA as reported for the year which is a bit high and might limit the options on the merger and acquisition front in the upcoming periods. This is unless the company is of course willing to further dilute the shareholder base.

With 51.1 million diluted shares outstanding, and those shares currently exchanging hands at $90 per share, equity is valued at roughly $4.6 billion. This values equity at 2.1 times annual sales of $2.15 billion and roughly 33 times annual GAAP earnings.

History Of Growth

Hain Celestial has roughly quadrupled its sales between 2004 and 2014, increasing sales at about 15% per annum on average. Sales have risen from just about $500 million to little over $2.1 billion across this time period. It should be noted that the total outstanding share base rose by some 30% in the meantime, which results in average dilution of 3-4% per annum.

Furthermore, the company's net debt position rose from just about $100 million to $750 million at the same time driven by acquisitions of course, thereby increasing the enterprise value of the business even more.

So while the growth looks very impressive, and the company continues to guide for very strong growth in the coming year, I do think it is important to realize that a modest part of this historical growth results from acquisitions which has resulted in dilution of the shareholder base and has increased leverage.

The continued increase in leverage will be limited going forwards given the high debt/EBITDA ratios at this moment. Of course dilution in the shareholder base still is among the possibilities to finance any potential future deals.

Final Takeaway

Almost a year ago, back in October of 2013 I last checked upon the prospects for Hain Celestial following an upgrade from analysts at Raymond James.

At the time I noted that Hain was a great company growing sales at an impressive pace amidst the increased demand for natural and organic growth, combined with acquisitions. Yet I had a few reasons to be cautious including a steep valuation, reported growth being ¨inflated¨ through acquisitions, the increase in leverage, continued dilution of the shareholder base and lack of dividends.

Despite a roughly 10-15% increase in the share price ever since, I continue to reiterate my stance avoiding the shares as the current risks continue to outweigh the appeal in my eyes. That being said, the business itself is doing great, something investors should not confuse with a great investment opportunity. Furthermore it is very much possible that the company will be a dominant player by 2020 or be acquired at some point in the future, but I don't like to bet on such an event. Rather I would like a substantial margin of safety before initiating a position, something which I don't see happening anytime soon.

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.