HAIN: Do You Know What You Own? Part II

HAIN is on our Best Ideas list as a short.  Our sum-of-the-parts analysis suggests ~50% downside.


Different people have different opinions of what makes a good investment.  We have a difficult time believing that HAIN is worth anywhere close to where it trades today.  We believe HAIN UK (the mature ambient grocery business) should not trade at the same cash flow multiple HAIN USA.

 

We understand that HAIN is a cult stock in the organic space but, to us, that’s part of the problem.  In our view, this company has an abundance of issues that simply don’t add up.  Maybe we’re wrong.  Maybe they’ll be able to make accretive acquisitions in the organic space forever, but we wouldn’t count on it.  Roll-up stories are inherently risky and tend to have ugly endings.  Yet, this risk is notably absent from the stock’s valuation.

 

The Tilda acquisition may be the first major crack in the acquisition story.  Does management really know what they own in Tilda?  Time will tell.

 

We have a long list of issues with HAIN:

  1. It’s a roll-up with an unsustainable margin structure and should be valued as such.
  2. Very few of the company’s products are brand names and all are susceptible to competitive incursions.
  3. As a roll-up, HAIN is anything but an “innovator” in the space.  It’s clear the company is underinvesting in its current brands, which brings into question the sustainability of the company’s long-term organic growth rate.
  4. Very few brands have number one market share positions.
  5. The company is less than transparent with key metrics needed to conduct proper fundamental analysis.
  6. Management manufactures “EPS” to make the business look better than it is.
  7. Management often makes deceiving statements about the business in public forums.
  8. Management is overpaid and rapidly selling stock.
  9. Management, particularly the CEO, is put on a pedestal as a visionary.

 

What is Hain’s True Organic Growth Rate?

“The way we always measure organic growth is we take the existing businesses and the growth that we drive for that in the quarter. And we take only the gains that we drive on acquisition. So the only acquisition we have in the U.S. this year is the Rudi's. And I believe we drove about $2 million in growth this quarter on Rudi's that wasn't there prior to us owning it.”

-Steven Smith, CFO


”We had strong Q2 organic growth of 8%, which is consistent with what our Q1 organic increase was.”

-John Carroll, CEO of HAIN USA


Hedgeye: Based on the company’s definition of organic growth, we calculate that HAIN USA delivered 2Q15 revenue growth of +3%, excluding Rudi’s.  After giving them credit for the $10.2 million MaraNatha adjustment, this revenue growth doubles to +6%.  Will they adjust any improvements in MaraNatha when it returns to the shelves in order to not overstate potential upside to the numbers?

 

HAIN UK, ex-Tilda, only posted revenue growth of +6%.  If both segments miss the mark, how then is management coming up with its stated +8% organic growth rate?  We have reason to believe management is severely overstating this number.

 

Management’s Deceptive Comments

“99% of our food products don’t contain GMOs.”

-Irwin Simon, CEO


Hedgeye: A cursory glance at Hain’s food products shows that this is statement is not true.

 

“Later this year, we expect to see Tilda in the U.S. being sold in major club and major retailers.”

-Irwin Simon, CEO


Hedgeye: Mr. Simon is implying there is significant upside to be had from introducing Tilda to “major retailers” in the U.S.  He later goes on to say, “Right now, we’re not about to name those, but we expect this by the end of our fiscal year that we will see a lot more of Tilda in the U.S.”  Tilda is currently offered on Amazon and at Walmart.  It does not appear to be sold at Whole Foods, Target, or Costco.

 

“And there are two major retailers that will be carrying Tilda in Europe, where today it’s mostly sold within the ethnic market.”

-Irwin Simon, CEO


Hedgeye: The implication is that Tilda rice is currently “mostly sold within the ethnic market” in Europe.  What he doesn’t tell you is that Tilda is already available at Tesco and Sainsbury’s.  In addition, Sainsbury's is already selling private label Basmati rice at more than a 50% discount to Tilda’s retail price.  Tilda is clearly not mostly sold in the ethnic market.

 

Upside to UK Margins Hinges on Tilda

Below is a back and forth between an analyst from Oppenheimer and Hain’s CFO.

 

Rupesh Parikh, Oppenheimer: “So, Steve, I wanted to get a little more color on operating margins. Maybe if you can, help me understand maybe the operating margin cadence in Q3 and Q4. Based on your commentary, it seems like maybe Q4 we could expect more improvement than Q3?”

 

Steven Smith, CFO: “Yes, that’s true.”

 

Rupesh Parikh, Oppenheimer: “Okay. Is that mainly driven by the productivity initiatives, or is there anything else unique we should be considering?”

 

Steven Smith, CFO: “It’s productivity and it’s just mix on Tilda, which is bigger because of Ramadan and shipments like that. That would be a big part of it.”

 

Hedgeye: There’s currently ample noise in the market place around the collapse in Paddy-Basmati pricing spreads.  This could lead to a significant decline in Tilda’s gross margins.  Did the sellers know spreads were peaking in 2013?  Is this why they sold the business to HAIN at such a favorable price?

 


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