Hain Celestial Looks Appealing Despite Disappointing Performance
Healthy snacking continues to be a growth industry in North America. The market size was approximately $91 billion in 2022 andis expected to grow in the 6% to 7% range for the foreseeable future. One of the leaders in that industry is Hain Celestial Group Inc. (NASDAQ:HAIN).
The company manufactures and sells cereal bars, soups, yogurts, nut butters, hot-eating desserts, refrigerated and frozen plant-based meat alternative products, jams, fruit spreads, jellies, honey and natural sweeteners and other food products. The company also produces infant products as well as skin, hair and oral care products. Key brands include Celestial, Earths Best, Hain Pure Foods, Health Valley and Spectrum.
Incorporated in 1993 and headquartered in Boulder, Colorado, the company currently has a market capitalization of $861 million.
Strategic plan
The company recently unveiled a strategic plan to accelerate a profitable growth path. By fiscal 2027, Hain Celestial expects to deliver sustained revenue and profit growth and expand its market reach. The company said it will focus and simplify its footprint by maintaining direct presence in five key markets the U.S., Canada, U.K., Ireland and Europe.
The company expects its new fuel program to achieve approximately 400 to 500 basis points of adjusted gross margin improvement and contribute to the delivery of $400 million in cumulative free cash flow by 2027. The company also announced a formal restructuring program targeting annualized savings of $130 million to $150 million by 2027.
ParmCrisps
In December 2021, the company completed the acquisition of the producer and marketer of the ParmCrisps and Thinsters brands for $259 million. The acquisition was supposed to be accretive to Ebitda and earnings in subsequent years. However, in the second quarter of 2023, the company recorded pre-tax non-cash impairment charges of $156.6 million related to the acquired business, which had experienced a significant loss in distribution.
In a statement, CEO Wendy P. Davidson said, Its always tough to Monday morning quarterback and look back on decisions that were made, but we have spent a fair amount of time scrutinizing the assumptions that went into the acquisition and what has happened and transpired since.
ParmCrisps are baked snacks formulated with parmesan cheese and other flavors, whle Thinsters are lower-calorie, small-sized cookies. The company's assumptions on consumer trends were correct, but sales relied on a relationship with the keto diet, which subsequently declined in popularity. There were also customer and channel concentration issues that affected sales.
Financial results
In August, Hain Celestial reported fourth-quarter and full-year results for the period ending June 30. Net sales decreased 2% to $447.8 million. When adjusted for foreign exchange and other one-time items, net sales decreased 1.5%. The decrease was primarily due to lower sales in personal care and ParmCrisps resulting from reduced customer distribution and promotion and was partially offset by higher sales in yogurt, baby and tea products. The adjusted gross margin was 22.7%, a 3.25% increase from the same quarter last year. Adjusted net income was $10 million compared to $7.60 million in the prior-year period.
Adjusted Ebitda on a constant currency basis was $43.5 million, up from $35.4 million in the fourth quarter of 2022. The adjusted Ebitda margin on a constant currency basis was 9.7%, a 200-basis point increase compared to the same period last year. Adjusted earnings per share were 11 cents, up from 8 cents in the prior-year period.
Operating cash flow was $40.5 million and free cash flow was $34.1 million. Total cash and equivalents as of June 30 was $53.4 million and total debt was $828.7 million. The leverage ratio improved to 4.3 from 4.6 times at the end of the third quarter ending March 31.
Davidson said, I am pleased to report that our fourth quarter and full-year results were near the high end of our expectations. We made significant progress during the quarter in key areas including a return to growth for both Sensible Portions and Celestial Seasonings bagged tea and an increase in net sales for our international business, despite a slight decline in overall net sales compared to the prior year.
Valuation
The company provided guidance for the 2024 fiscal year ending June 30, 2024, which calls for revenue growth between 2% and 40% as well as adjusted Ebitda between $155 million and $165 million.
Consensus analyst earnings per share estimates the 2024 fiscal year are 41 cents, which puts the stock trading at 24 times forward earnings estimates. The enterprise value/Ebitda ratio is approximately 10.60.
The GuruFocus discounted cash flow calculator creates a value of $15 when using 41 cents as the starting point and a 20% 10-year growth rate. The discount rate being used is 10%.
There are nine Wall Street analysts covering the company with an average price target of $14.22, including a high of $30 and a low of $11. There are two buy ratings, seven hold ratings and no sell ratings.
The company does not pay a dividend, but has been a major repurchaser of its own shares in recent years.
Guru trades
Gurus who have purchased shares of the company recently in Keeley-Teeton Advisors and First Eagle Investment (Trades, Portfolio). Investors who have reduced or sold out of their positions include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Ray Dalio (Trades, Portfolio)'s Bridgewater Associates.
Summary
The company is selling at 52-week lows and if the strategic plan takes hold in coming years, there could be substantial upside in the stock.
This article first appeared on GuruFocus.
