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HAIN: Strong Q Looks Stronger Than It Is

HAIN remains on the Hedgeye Best Ideas list as a short.

 

On the surface, HAIN reported a strong quarter and the stock responded nicely, trading up ~11% on the day.  4Q14 adjusted earnings from continuing operations were $0.90 compared to $0.65 in 4Q13, good for a 35% increase year-over-year.  On the call, management reported a strong 7.5% organic growth rate for 4Q14 and 8.5% for FY14.  Guidance for organic growth remains in the mid-single digit to high-single digit range for FY15.

 

The adjustments made to continuing operations are a list of recurring and non-recurring items that, in our view, lower the quality of the reported number.  Notably, these adjustments are getting bigger each quarter.  In 4Q14 the adjustments to net income totaled $0.15, 50% greater than the $0.10 of adjustments in 4Q13.

 

The current adjustments to net income of $10.3 million are principally from:

  1. $6 million related to the voluntary recall
  2. Start-up cost of $3.8 million primarily related to Project Castle (the chilled desserts facility in the UK)
  3. $2.9 million of acquisition related fees and expenses, including integration costs from Tilda and Rudi’s
  4. $2.2 million non-cash valuation reserve on net operating losses incurred along with the start-up of the non-dairy facility in Europe

 

It’s amazing to see that a company can get away with adjusting earnings for growth related innovation and operating costs that are desperately needed to grow organic revenues.  The company also reported $4 million of non-recurring income including a true-up of contingent consideration earn outs, unrealized currency gains and gains from the sale of shares.

 

On top of that, the company continues to push SG&A lower in order to drive operating margins.  In 4Q14, SG&A on an “adjusted” basis (excl. amortization of acquired intangible assets) was 14.4% of net sales, a 110 bps improvement versus last year. 

 

HAIN: Strong Q Looks Stronger Than It Is - 8 20 2014 2 25 28 PM

 

Therefore, despite higher commodity costs, HAIN “effectively managed operating expenses” to report a 49% increase in “adjusted” operating income to $73.9 million and a 200 bps improvement in operating margin to 12.7%.  We continue to view the steady, significant reduction in SG&A as a competitive long-term disadvantage.  In fact, we’d go as far as to say that the company’s margin structure is highly unsustainable and, as a result, it is currently over-earning in an increasingly competitive environment.

 

One of the core tenets of our short call was the lack of leverage in the business model.  Despite a 200 bps improvement in operating margins, the company only reported “adjusted” EBITDA of $79.5 million or 13.6% of net sales versus 13.5% last year.  It’s clear to us that the management is far away from hitting its objective of delivering long-term growth EBITDA of 15% to 18% of net sales.

 

The company’s inability to leverage its cost structure is clearly illustrated in the chart below.

 

HAIN: Strong Q Looks Stronger Than It Is - 22

 

The biggest risk to our short thesis was the strong revenue growth the organic sector is seeing.  But, as you can see below, sales trends are expected to continue to slow at HAIN.  In order to sustain its past level of growth, management will need to acquire more brands in FY15. 

 

HAIN: Strong Q Looks Stronger Than It Is - 33

 

Net sales guidance for FY15 is between $2.7 billion to $2.8 billion, with approximately two-thirds of growth coming from acquisitions and one-third coming from organic sales.  If this plays out, HAIN expects to deliver FY15 EPS within the guided range of $3.72 to $3.90.

 

While today is painful, we are sticking with our short thesis.

 

Call or email with questions.

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst


Cartoon of the Day: Ain't No Hawk!

Takeaway: Think the Fed's going to suddenly strike a hawkish tone? Don't hold your breath.

Cartoon of the Day: Ain't No Hawk! - JacksonHole cartoon 08.20.2014

 


Expert Call: Coffee Prices May Move Much Higher From Here

Expert Call: Coffee Prices May Move Much Higher From Here - 1

 

Hedgeye Macro is hosting an expert call this Thursday, August 21st at 11:00 a.m. EDT to better understand the developing risks to Brazilian coffee production capacity next year and beyond. Brazil accounts for more than 1/3rd of global coffee production, and the damage from an unprecedented drought in the first three months of 2014 may have caused irreparable damage to a much larger portion of the 2015-16 crop than believed by consensus.

 

Our expert speaker will be Judith Ganes-Chase, founder and president of Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001.


Call Objective:

  •  With irreparable damage from last winter’s ---(BRAZIL SUMMER) drought already manifest, consensus opinion is much too optimistic on Brazil’s production capacity into next year and 2016
  • Lifecycle of the Tree: The idea that above average rainfall can restore soil moisture and rehydrate the trees allowing the lack of vegetative growth to be offset is simply not true. Production estimates for a 2015-16 crop based on the coffee from trees that have not yet flowered are PREMATURE
  • End users may be able to hedge OTC through financial intermediaries, but the assumption that the crop paid for in the future is locked-in and available is an issue. Scarcity may be a problem à ESPECIALLY OF BETTER GRADES OF COFFEE.
  • Relevant Tickers: CAFE, JO, SBUX, DNKN, MCD, MDLZ, GMCR, THI, KKD  

 

Participant Dialing Instructions:

Toll Free Number:

Direct Dial Number:

Conference Code: 998836#

Materials: CLICK HERE

 

About Judith-Ganes Chase:

Judy has over 25 years of experience covering the agricultural softs space. Prior to founding Ganes Consulting in 2001, she spent most of her career as a senior softs analyst at Merrill Lynch and Shearson Lehman. Her most recent post was as the Director of News and Research at InterCommercial Markets.

 

Ms. Ganes-Chase is a contributing member to Elliott Associates, Gerson-Lehrman Groups Council, and Coleman Research Group. She is also a participant in the ICE (Intercontinental Exchange) research program and makes regular contributions to several industry-specific publications: Specialty Coffee Association of America, National Coffee Association, and the International Women’s Coffee Alliance (IWCA).    


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Expert Call: Coffee Prices May Move Much Higher From Here

Expert Call: Coffee Prices May Move Much Higher From Here - 1

 

Hedgeye Macro is hosting an expert call this Thursday, August 21st at 11:00 a.m. EDT to better understand the developing risks to Brazilian coffee production capacity next year and beyond. Brazil accounts for more than 1/3rd of global coffee production, and the damage from an unprecedented drought in the first three months of 2014 may have caused irreparable damage to a much larger portion of the 2015-16 crop than believed by consensus.

 

Our expert speaker will be Judith Ganes-Chase, founder and president of Ganes Consulting, an independent agricultural softs commodities research and consultancy firm. Judy worked on the sell-side for 20 years before founding J. Ganes Consulting in 2001.


Call Objective:

  •  With irreparable damage from last winter’s ---(BRAZIL SUMMER) drought already manifest, consensus opinion is much too optimistic on Brazil’s production capacity into next year and 2016
  • Lifecycle of the Tree: The idea that above average rainfall can restore soil moisture and rehydrate the trees allowing the lack of vegetative growth to be offset is simply not true. Production estimates for a 2015-16 crop based on the coffee from trees that have not yet flowered are PREMATURE
  • End users may be able to hedge OTC through financial intermediaries, but the assumption that the crop paid for in the future is locked-in and available is an issue. Scarcity may be a problem à ESPECIALLY OF BETTER GRADES OF COFFEE.
  • Relevant Tickers: CAFE, JO, SBUX, DNKN, MCD, MDLZ, GMCR, THI, KKD  

 

Participant Dialing Instructions:

Toll Free Number:

Direct Dial Number:

Conference Code: 998836#

Materials: CLICK HERE

 

About Judith-Ganes Chase:

Judy has over 25 years of experience covering the agricultural softs space. Prior to founding Ganes Consulting in 2001, she spent most of her career as a senior softs analyst at Merrill Lynch and Shearson Lehman. Her most recent post was as the Director of News and Research at InterCommercial Markets.

 

Ms. Ganes-Chase is a contributing member to Elliott Associates, Gerson-Lehrman Groups Council, and Coleman Research Group. She is also a participant in the ICE (Intercontinental Exchange) research program and makes regular contributions to several industry-specific publications: Specialty Coffee Association of America, National Coffee Association, and the International Women’s Coffee Alliance (IWCA).    

 

Howard Penney

Managing Director

 

Fred Masotta

Analyst

 


$IRF Rockets 47% on Takeover; Hedgeye Analyst Craig Berger Called It

Takeaway: Hedgeye semiconductor analyst Craig Berger has been all over IRF which soared 47% today.

Kaboom.

 

Shares of International Rectifier Corporation (IRF) rocketed 47% today on news the semiconductor company is being acquired by Infineon (IFX).

 

Why do we mention it?

 

Hedgeye semiconductor analyst Craig Berger has been highlighting the upside opportunity in IRF since he assumed his new position at Hedgeye earlier this summer. He first published a bullish research note on IRF back on July 1st. He followed that up with a video on HedgeyeTV shortly afterwards highlighting various M&A opportunities in the space. He also published a note on Monday arguing shares had an attractive risk/reward apart from semi cycle risks with $36 fair value: 

 

We think IRF is one of the better small/mid-cap stories in the chip sector right now, with the potential for meaningful increases in earnings power from cycle to cycle.

 

Topping it all off, Berger recorded a video on IRF that we released on HedgeyeTV yesterday suggesting shares had considerable upside into the 40s.

 

 

It pays to listen to Berger and tune into HedgeyeTV.


TGT – Gives Cornell Six Month Gift

Takeaway: TGT bought six mos for Cornell to learn the biz w/o risk of missing numbers. 2015 expectations are critical without knowing new CEO plan.

Conclusion: TGT just bought itself six months. New CEO Cornell said the right things on the call and expressed a sense of urgency to fix the company – but without getting out over his skis. Overall, good first impression. The way we see it, only $0.30 of the $0.50 guide down is accounted for operationally. That leaves Cornell a pad while he decides what to do to fix a company in dire need of a turnaround. No wonder the stock is up, especially with the highest short interest since the last recession. Keep in mind that a turnaround of this magnitude does not come solely through better management, better processes, or best practices. It costs money, and potentially quite a bit. The key here – until we hear Cornell’s plan – will be where the Street shakes out for 2015. Based on the size of the capital plan, it’s quite possible that TGT does not earn $4.00 for another 3-years. If there’s no capital plan, then it will be easy for us to remain flat-out bearish. In the meantime, if expectations come down to the $3.50 range for 2015, it will be tough to stay short Target – despite valuation. Otherwise, valuation is lofty enough for us to stick with our bearish positioning pending a roadmap as to what Cornell will do (as compared to what he should do).

 

Full Details

The fact that TGT did not trade down on a $0.50 (14%) guide-down in earnings for a year that is already half over is pretty amazing. That begs the question, if the stock is down only 5% year-to-date on a 29% cumulative earnings guide-down, what will take it lower? The answer is another guide down. That seems ridiculous at face value for two reasons; 1) we just saw the biggest guide down ever for TGT, and 2) the way we see it, only $0.30 of the $0.50 earnings reduction can be accounted for operationally. The remainder gives Cornell a lot of breathing room as he develops a plan for Target to escape from inadequacy. Yes, TGT just bought time, and by the stock’s reaction it got a great deal. But this says nothing about the earnings power for the company in 2015 and 2016. We think that we could be looking at sub $4.00 EPS for each of the next 3-years.

 

The key near-term factor is where consensus numbers shake out for 2015. If they’re as low as $3.50, it will be tough to stay short Target. Looking 1-2 quarters out, we need to know Cornell’s plan. We can rant all we want about what we think the right capital plan is for this company, but the one he chooses is what matters.

 

Keep in mind that the guy has been on the job for just 8 days. No one (including us) has a clue as to what he is going to do to fix this company. We’ve been of the camp that he can either stick with Target1.0 and make tweaks to the model that will grow earnings at an accelerated clip near-term (good for stock today, not 2-3 years out), or he can go for Target2.0 and make the major investment needed to restore Target to its former glory (bad for near-term earnings, good for long term stock). Cornell did a perfectly fine job in his debut. He said all the things a new CEO at a mega cap company should say, but did not get too far out over his skis. No promises on when we’ll see an action plan, but he did appear to have a sense of urgency in getting something done.

 

From where we sit, today’s stock action is solely a manifestation of the fact that the big earnings whiff has happened, and why would anyone be short it from here otherwise. But the fact of the matter is that the earnings draw down really has nothing to do with the capital allocation it will take to fix this company and meaningfully accelerate growth across categories. Keep in mind that we heard the Chief Merchant talk on the conference call for 27 minutes about all of the ‘amazing’ product initiatives like Andrew Zimmern Home line (solid), Honest Company by Jessica Alba (A+), Skechers partnership (very good) to Beaver Canoe (huh). But despite all this, Target can’t comp.  e-commerce was ok, because of mobile – traffic on the core site was down. Even mediocre brands are growing web traffic. Why should TGT’s be down?  Our point here is that there’s more to do than just blocking and tackling, which will end up being expensive. It might be the best capital Target ever spends, but it could be a lot.

 

TGT – Gives Cornell Six Month Gift - tgt financials


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.30%
  • SHORT SIGNALS 78.51%
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