Hain Celestial Delivers Strong Growth; Wall Street Yawns

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If you've spent much time following Wall Street, you know that a company's strong financial performance isn't always rewarded with an upwardly mobile stock price, especially if the company operates in a sector that has fallen out of favor with investors.

Hain Celestial Group ( HAIN ) is a case in point.

Hain is the nation's top supplier of natural and organic food and personal care products. Its lineup includes well-known brands such as Celestial Seasonings teas, Earth's Best baby food, Health Valley soups and cereal bars and Terra Chips.

The company sells its goods in roughly 50 countries worldwide, though more than 60% of its revenue comes from the U.S.

Business has been good. Over the last nine quarters, Hain has grown earnings at least 12% and sales at least 19%. Seven times during that stretch, earnings have risen by at least 31% year over year.

But the company's stock price has largely gone sideways over the last seven months, even as IBD's Packaged Food group has risen more than 20% during the same time frame.

Raised Eyebrows

That disparity has raised eyebrows among some industry observers.

"Despite healthy earnings recently, (Hain's) stock has underperformed the food group," JPMorgan analyst Ken Goldman noted in a recent report.

Part of the problem, he says, has been "the underperformance of better-for-you food stocks as a whole."

Goldman didn't mention specific stocks. However, Hain's share price might have been hurt by the performances of organic and natural foods retailers likeWhole Foods Market ( WFM ) andThe Fresh Market ( TFM ).

Both of those companies have seen their stock prices decline over the last few months even as they, like Hain, continue to produce solid financial growth.

Those issues notwithstanding, Goldman still sees plenty of growth potential in the natural and organic foods segment.

Among other things, he points to attendance at the Natural Products Expo West trade show that took place in early March in Anaheim, Calif.

The event was "by all accounts the best attended in years," Goldman noted. In addition, large traditional grocery store operators likeKroger ( KR ) andSafeway ( SWY ) "have stated their desire" to expand space for natural and organic shelf stable foods.

"Better-for-you eating remains a very strong category in general," Goldman said. "When the 'reversion to the mean' trade in food eventually abates, growth-oriented companies like Hain will be positioned to outperform again in our view."

Citigroup analyst Gregory Badishkanian sounds a similar refrain. In a report following Hain's second-quarter earnings announcement, Badishkanian said the natural/organic category in general, and Hain in particular, are primed for solid growth in coming quarters.

"Our confidence in Hain's ability to achieve our estimates is based on decent top-line growth, driven by continued consumer demand for natural/organic products," he said. "Hain's organic sales should grow substantially faster than the conventional food group."

Earnings Growth

Hain is already on a pretty good roll. Over the last five quarters it has grown earnings at least 31% and sales at least 22%.

The company is due to report fiscal third-quarter results on Tuesday. Analysts polled by Thomson Reuters expect profit to come in at 72 cents a share, a gain of 33% from the prior year.

During its fiscal second quarter, which ended in December, Hain logged earnings of 72 cents a share excluding items. That was up 36% from a year earlier and 3 cents above consensus analyst views.

Q2 Revenue

Operating free cash flow rose 47.6% to $106.8 million for the trailing 12 months ended Dec. 31. Adjusted EBITDA was $205.9 million for the trailing 12 months ended Dec. 31, an increase of 31.8% year over year.

Second-quarter revenue climbed 25% to $455.3 million. That was below the $473 million expected by analysts, in part because of the negative impact Hurricane Sandy had on business.

Hain's top line did get a boost from its October buyout of the U.K.'s Premier Foods, which brought aboard Hartley's jams, among other brands. The stock and cash deal was valued at around $320 million. Hain said the buyout helped its second-quarter revenue more than double in the U.K.

The company has made nearly 30 acquisitions since it was founded in 1993. Its strategy is to buy smaller entrepreneurial companies that are a good fit with Hain's business. It then uses its resources and expertise to manage and build the brands into better performers.

Hain has also benefited from recent strength in many of its core product categories, analysts say.

"The category strength is being driven by higher end consumer spending and the secular growth of organic food," Badishkanian noted. "Solid sales at Hain are a positive read through to the rest of the sector."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: HAIN , KR , SWY , TFM , WFM

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