Thursday Losers: Hain Lacks Organic Growth

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In a bid to keep growing, some companies resort to a steady stream of acquisitions. But appearances can be quite deceptive, as these deals often come with newly-issued shares and/or rising debt, both of which can impede per-share profits from growing. This "inorganic growth" strategy has been the hallmark of Hain Celestial (Nasdaq: HAIN) , which, ironically, is a leading purveyor of organic food and beverages. Every year, Hain makes a few deals and looks like a growth company, until you see that bottom-line results are often disappointing.

They're at it again. Hain released fiscal third-quarter results Wednesday evening that trailed sales and profit forecasts. Indeed, year-over-year sales fell -16% on an apples-to-apples basis, and are likely to stay negative in coming quarters, despite the inclusion of recent acquisitions. Shares are off more than -13% in Thursday trading.

The negative sales trends come at a time when organic foods have been in vogue. But organic foods cost more, and many cash-strapped consumers have been switching back to foods that don't carry the organic label. Analysts currently expect sales to rebound around +5% in this fiscal year that begins in July, though that forecast anticipates continued tuck-in acquisitions. They see profits rebounding a more robust +15% next year, but that forecast looks increasingly aggressive, as Hain's acquisitions no longer seem to boost profits when a higher share count is factored in.

In coming sessions, shares should come under further pressure as analysts' estimates ratchet lower, and growth-oriented fund managers move on to stocks that possess real "organic" growth.

Company Name (Ticker) Intra-Day Price Market Cap 52-Week High 52-Week Low 2010* P/E 2011* P/E
Hain Celestial (Nasdaq: HAIN) $18.12 $740M $21.08 $14.45 16.9 14.7
JDS Uniphase (Nasdaq: JDSU) $11.39 $2.4B $13.95 $4.44 31.6 21.5
Abercrombie & Fitch ( ANF ) $41.32 $3.6B $51.12 $22.70 22.3 15.8
Liz Claiborne ( LIZ ) $7.03 $660M $9.72 $2.40 Negative 22.0
*Based on consenus estimates prior to recent earnings release

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JDS Uniphase (Nasdaq: JDSU) was the ultimate poster child for the dot.com implosion ten years ago. Shares briefly surpassed $1,000 in the Nasdaq meltup, but eventually made their way down to $2. More recently, shares have started to perk up again, making it look like JDSU is a Comeback Kid. But after the company posted weak fiscal third-quarter results on Wednesday evening, shares are off around -15% today.

This time around, shares look to have suffered a much more temporary setback. Although fiscal third-quarter sales were a bit light, the company's salesmen were busy inking new deals, which should enable JDS Uniphase to post sharply higher results in the current quarter. It's not often that you see a stock slide while management issues sales guidance that is more than +10% above consensus forecasts, and represents a +20% sequential improvement.

So why are investors dumping the stock? In large part, it's a function of heightened expectations. Investors recently bid up the stock in hopes of a blow-out quarter. The "whisper number" had JDS Uniphase bagging sales of around $360 million, well above the published forecasts of around $340 million. (Actual sales came in even lower at $332 million).

Despite the weak results, the robust forward outlook from management should lead analysts' to raise their profit forecasts for the current quarter by a few cents. And fiscal (June) 2011 profits now look set to be about 20% higher than the current $0.53 a share forecast, based on yet-to-be-revised assumptions for gross margins and operating expenses. Today's sell-off looks overdone, and as investors digest an increasingly robust outlook, shares should move their way back to the 52-week high of $14, which is some 20% above current levels.

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A host of retailers are taking it on the chin after tepid sales reports. Same-store sales at Abercrombie & Fitch ( ANF ) fell -7%, pushing its shares down by a similar percentage. Retailer Liz Claiborne ( LIZ ) stands out as the sector's top laggard, dropping more than -10% on weak results. Most retailers begin to report quarterly results next week, and after the robust rebound the sector has posted over the last year, less-than-stellar results - or an uninspiring forecast - could lead to profit-taking.

-- David Sterman
Contributor
StreetAuthority

Disclosure: David Sterman does not own shares of any security mentioned in this article.



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.

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This article appears in: Investing , Stocks

Referenced Stocks: ANF , HAIN , JDSU , LIZ

David Sterman

David Sterman

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