Hain Celestial: Why I'm Very Confident In Its Long-Term Prospects

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About: The Hain Celestial Group, Inc. (HAIN)
by: Grant Dittman
Summary

Has the best stable of health-conscious brands in the packaged food industry.

New CEO has new strategic approach with their brands.

Stock will go up in time as revenue growth translates into higher profits.

Hain Celestial (HAIN) is a company that has one of the best stables of health-conscious brands in the packaged food industry, and despite some temporary hiccups, they are poised for continual growth.

Hain Celestial Background

Hain Celestial was and is extremely well positioned to benefit from the broad consumer change to prefer food that is healthier. Hain Celestial was started in 1993 and, led by Irwin Simon, it went on to roll up many small organics and natural brands in the aim to have a large portfolio. This worked extremely well, as consumer demand ultimately shifted to the organic category, as is evident in the many health-conscious grocery stores that have popped up in my hometown: Whole Foods, Natural Grocers (NGVC), Fresh Thyme, and even Walmart (WMT) adding a bigger section for healthier food. The company does around 46% of its $2.45 billion of revenue in the United States and does 38% of its revenue in the UK. Similarly, most of the food manufacturing plants are in the United States and the UK, while some 42% of their product manufacturing is contracted out to co-packers.

Hain's revenue doubled during the 10-year period from 2008 to 2018. Still, during this ten year period the operating margins on their revenue have been below industry averages in the packaged-food industry, which in turn is why the company has had a below-industry average return on invested capital in the last 10 years.

*My own table, Using 10 yr averages courtesy of data compiled from Morningstar

Also, Hain got to the point where they had too many brands, which is kind of both a good thing and a bad thing. While they currently have a lot of options/brands to choose from, in the past this prohibited them from making a focused effort with regard to resource allocation - in terms of which products to focus on - with the aim of creating some powerhouse brands. An example of a company that has succeeded with a more focus approach is Kraft Heinz (NASDAQ:KHC), which has eight brands that do north of $1 billion each. There are a handful of brands in Hain's portfolio that have the potential to scale and become true powerhouse brands, and there are some that have a limited ability to go international or become mainstream. Surely it would be better to invest more heavily in brands with the most growth potential, rather than indexing resources to Hain's 60 brands regardless of growth potential.

Brands Are Attractive

Clearly, the biggest reason I am a shareholder of Hain is that its brands are extremely attractive and have room for growth. They really do have the best stable of health-conscious brands in the packaged food industry. Brands include Celestial Seasonings tea, TERRAveggie chips, Garden of Eatin' tortilla chips, The Greek Gods yogurt, MaraNatha almond butter, Imagine soups, Rudi's Bakery bread, Arrowhead Mills mixes/cereals, Sensible Portions veggie chips, Bearitos chips, Earth's Best baby food, Spectrum condiments/oils, and many more. As seen below, Hain also has a personal care business that includes brands such as Jāsön natural products, Alba Botanica and even Earth's Best disposable diapers.

*Table obtained from Hain Celestials 2017 10-K.

To further research their brands, I searched 31 of their main brands on Amazon.com, and I added any products of that brand with more than 50 reviews to the following table. This serves as a focus group in a way and gives evidence to the assertion that Hain has the premier stable of health-conscious brands in the food industry, as the mean average product review was a 3.9 out of 5.

Brand Name Product Average Rating on Amazon # of Reviews
Arrowhead Mills® Arrowhead Mills Organic Cereal (3 flavors to choose from) 4.5/5 209
Arrowhead Mills® Organic White Flour 22oz. 4.0/5 198
Bearitos® Tortilla Chips 16oz. (3 flavors to choose from) 3.5/5 52
Casbah® Authentic Grains (8 flavors to choose from) 4/5 216
Celestial Seasonings® Assorted Tea (18 flavors to choose from) 4.7/5 2,230
DeBoles® Organic Pasta 8 oz. (3 flavors to choose from) 4.2/5 58
DREAM® Coconut Drink 32 fl oz. (3 flavors to choose from) 4.3/5 148
DREAM® Classic Original Organic Rice Drink 32 fl oz. 3.7/5 110
Earth’s Best® Organic Infant Formula (6 flavors to choose from) 3.9/5 1,132
Earth’s Best® Organic Stage 2 Baby Food (20 flavors to choose from) 3.5/5 1,957
Earth’s Best® Organic Stage 3 Baby Food 4.2oz (20 flavors to choose from) 4/5 749
Ella's Kitchen® 6-month baby food 3.5oz (13 flavors to choose from) 4.2/5 164
Garden of Eatin’® Chips (7 flavors to choose from) 3.8/5 208
GG® Scandinavian Bran Crispbread 3.5oz. 3.5/5 370
Hain Pure Foods® Featherweight Baking Powder 8oz. 4.2/5 390
Hain Pure Foods® Safflower Mayonnaise 12oz. 4.1/5 65
Health Valley® Organic Soup 15oz. (7 flavors to choose from) 3.4/5 384
Health Valley® Organic Multigrain Cereal Bars (3 flavors to choose from) 3.8/5 351
Hollywood® Safflower Oil 32oz. 4.5/5 159
Imagine® Organic Soup 17.3oz (6 flavors to choose from) 3.9/5 97
MaraNatha® Peanut Butter 16oz (6 flavors to choose from) 3.9/5 105
Earth's Best® TenderCare Chlorine-Free Disposable Baby Diapers Newborn Size 40 count 4/5 1,814
SENSIBLE PORTIONS® Garden Veggie Chips 1oz. bag (7 flavors to choose from) 4.1/5 428
SENSIBLE PORTIONS® Garden Veggie Straws Zesty Ranch 4.2/5 217
Spectrum® Naturals Organic Shortening All Vegetable 24oz 4.4/5 253
SunSpire® Chocolate (7 flavors to choose from) 3.7/5 101
TERRA® Veggie Chips (3 flavors to choose from) 3.7/5 1,018
Tilda® Tilda Legendary Rice Pure Original Basmati 3.8/5 237
Walnut Acres® Organic Beans (4 flavors to choose from) 4/5 103
Westbrae Natural® Organic Mustard (4 flavors to choose from) 4.4/5 50
Westbrae Natural® Organic Beans (9 flavors to choose from) 3.5/5 296

*My own table. All reviews obtained from Amazon.com, and most of these products listed on Amazon are sold in packs which varies from the way they are sold in grocery stores

Analyzing the Packaged Food Industry

Another reason I am long Hain is that it is in an industry that gives it the ability to earn high returns on invested capital for the long term. I can say with extreme confidence that there will be high demand for high-quality food for many decades to come, whereas I do not have quite the same long-term confidence in some different companies in other industries where constant change is taking place.

One of the main reasons the consumer packaged goods industry is a good industry to be in is that there is a huge loyalty factor that consumers have for brands with which they've had favorable encounters or experiences. This results in an assurance for the consumer that the taste/experience will be good based on past experiences, which leads to a durable competitive advantage that can last quite a long time (e.g., General Mills (NYSE:GIS) brands such as Betty Crocker and Cheerios, which were started in the first half of the 20th century) - nearly the opposite situation than that of a commodity product. So strong brands essentially serve as a promise in the minds of consumers that enable them to have pricing power over private label and store brands. If you look at some of Hain's competition - Nestle (OTCPK:NSRGY), ConAgra (CAG), Kraft Heinz, Mondelez (MDLZ), Unilever (UN), Kellog Company (K), PepsiCo (PEP), The Hershey Company (HSY), Danone (OTCQX:DANOY), Clif Bar & Company, and Chobani - they all have managed to earn high returns on equity in the last decade. That said, recently companies like Kraft Heinz and The Hershey Company have seen revenue growth slow due to the shift of consumers demanding healthier food, which benefits a company like Hain.

Analyzing the Balance Sheet & Valuation

This stock has been thrashed in the last couple of years, in part due to an SEC investigation involving a couple of suppliers getting discounts so that Hain could meet quarterly sales targets. And although the concluded SEC investigation has damaged the market capitalization of the company, the problem is behind Hain. And the reputation of the brands remains intact and unharmed with the consumers which is the most important thing. And now, there is a new CEO and chairman of the board that have experience from the likes of Pinnacle and ConAgra.

Clearly, in Q1 2019, the company delivered poor numbers which included net sales decreasing 5%, negative operating cash flow of only $19 million, and a net loss of $38 million. If this continues, clearly Hain will not be a good investment. However, the management cited three temporary factors for this result and they still expect full-year top line growth of 2-4% and operating cash flow of roughly $100 million.

Their balance sheet is strong in my view as the $1 billion of goodwill on the balance sheet is very legitimate given the strength of the brands. The balance sheet is still robust even when looking at their $693 million in debt; if need be, the company could tap their revolving credit facility and have the ability to sell brands for healthy market multiples to deleverage if an extremely unlikely situation would necessitate that.

*Table obtained from Hain Celestials 2017 10-K.

Currently, Hain is trying to sell Hain Protein, and is expected to close a deal by the end of 2019. Hain Protein, which is the chicken & turkey division, has seen operating losses in recent quarters from the commoditized nature of the segment. The expected selling price is difficult to predict, but management commentary has been upbeat on the sales prospects and poultry companies do have the cash to make serious bids.

In conclusion, I look at Hain and see a company that has growth potential, and is extremely sensibly priced. If Hain were to have $80 million in net income for the next four quarters, this would equate to a PE of 21, which is a fair multiple to pay. And I believe the valuation will go up in the years to come as sales continue to increase which will lead to higher net income.

Disclosure: I am/we are long HAIN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I a shareholder of Hain at an average cost of $17.26 per share