Central Garden & Pet: Strong 2021, Stronger 2022

Summary

• Central Garden & Pet has seen a very strong 2021, in part driven by some dealmaking announced late in 2020.
• The company has seen very strong momentum, with further growth seen in 2022.
• Taking profits early in 2021 has been a bit premature, as I am looking to add again in the mid-$40s.
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Central Garden & Pet Company (NASDAQ:CENT) surfaced on my investment radar at the start of 2021, as I concluded that some clouds were arriving after 2 substantial deals on which few details were announced. As it turned out, these deals have been quite accretive. After a strong year, the company is preparing for a stronger 2022, which makes those shares look quite compelling, certainly on further dips.

Back To Early 2021 - Uncertain Near Term Future

At the start of last year, I concluded that Central Garden & Pet has benefited from a Covid-19 induced surge for its pet & garden operations. The company announced two large deals late in 2020, yet with few financial details being announced, this dealmaking created some uncertainty on the investment thesis. I looked forward to seeing some clarity in 2021, as the uncertainty induced by the dealmaking actually led me to take some profit around the $40 mark.

As the name suggests, Central Garden is active in two major industries. The pet industry in total measures some $100 billion, with growth of the industry driven by secular trends, as the $33 billion garden segment is very large as well. The pandemic did not only make that people were spending more time and value on their pets, they did the same on outdoor activities as well.

The company has grown to a $2.7 billion business, driven by some 50 deals being announced over the past twenty-five years, with products sold across all the major retailers. The company was long a sleeping giant with sales stuck around $1.6-$1.7 billion through 2015, as the company was focusing on financial engineering, yet with the focus shifting towards the business, growth returned. The company has seen sales increase to $2.4 billion by 2019, with earnings reported at $1.60 per share, as a pullback in the shares made me initiate a position at $27 per share at the time.

Relatively soon after the fiscal 2019 results were released (with the company posting the results in the autumn of the year), the pandemic broke out as this impacted the results in a major way. 2020 sales grew 25% to $2.70 billion, as reported in November 2020, with GAAP earnings coming in at $2.20 per share. Despite this big increase in the results, it is important to realize that the deal only impacted the results for approximately half of the year.

Net debt has been cut almost entirely, as the company announced the purchase of Hopewell Nursery in December 2020, with no price or revenue contribution announced. Towards the end of the calendar year, the company paid $532 million for Green Garden Products. With Central Garden valued around $2.2 billion, these deals were substantial as few details on the acquisition prices were announced.

Having seen gains of 50% in an eighteen-month time period, I found myself in doubt, as I cut out of half of my position.

2021 - Eventful Year

In February 2021, Central posted its first quarter results and while revenues were up 23% margins took a beating. The company actually guided for 2021 earnings at around $1.90 per share, down thirty cents from the year before, albeit that it must be said that the deal does not include the contribution from dealmaking.

Second quarter sales growth accelerated to 33%, as the margin pressure has reversed with the company now guiding for adjusted earnings of $2.42 per share, or better. Net debt has risen to $939 million as a result of the dealmaking spree, as the company posted leverage at 2.5 times EBITDA based on the financial covenants.

Momentum was maintained in the third quarter with sales up 24% to $1.04 billion, as the company raised the full year earnings guidance to a minimum of $2.62 per share. In November, the company posted a 23% increase in full year sales to $3.3 billion as adjusted earnings came in as high as $2.92 per share, up a dollar from the initial guidance.

Net debt has been reduced to three quarters of a billion while EBITDA comes in at $330 million, with leverage ratios seen at roughly 2.3 times. The initial outlook for 2022 is comforting, with earnings seen at $3.10 per share, or better.

What Now?

Truth be said that I am very impressed with the performance of the business so far this year. The doubts at the start of 2021 have been evaporated as shares have traded in a $40-60 range, now trading hands at $52 per share. This translates into just a 16-17 times forward earnings multiple, all while the business has kept leverage under control, as solid cash flow generation and growing operations allow for leverage to rapidly come to below 2 times.

Given all of this, I can only conclude that I have been too cautious this time last year. The company has done a great job and management should have been given the benefit of the doubt, despite lack of details announced on the deals late in 2020.

Shares have seen some serious gains of the past year as the deals turned out to be just fine, and quite frankly I must say that current valuations look quite fair here. In fact, I would be happy to start buying, perhaps as a result of an inflation induced dip to the mid-$40s here, recognizing that I have been too cautious a year ago.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CENT either through stock ownership, options, or other derivatives. 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.