Everything is totally fine... It's different this time... No worries...
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:
- It’s a roll-up with an unsustainable margin structure and should be valued as such.
- Very few of the company’s products are brand names and all are susceptible to competitive incursions.
- 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.
- Very few brands have number one market share positions.
- The company is less than transparent with key metrics needed to conduct proper fundamental analysis.
- Management manufactures “EPS” to make the business look better than it is.
- Management often makes deceiving statements about the business in public forums.
- Management is overpaid and rapidly selling stock.
- 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?
Takeaway: Just the spark this underperforming stock needed. Solid all around.
- Major corporate clients continue to tell HOT that they will travel more
- International travel to and from US: +7%, reaching new highs
- Mexico/Indonesia: strong growth
- 2 uncertainties: Middle East and Europe
- 2014 NA REVPAR: 7%
- Group business continues to strengthen
- Supply picture benign. Not enough supply to bring down occupancy
- Little construction activity in upper upscale segments
- Expect NA recovery cycle to continue
- China: 2014 REVPAR up over 8% (ex Macau: +4%)
- Accounts for 14% of fees
- 15% of footprint
- 1/3 of pipeline
- LATAM REVPAR: +3%
- Brazil/Argentina continue to struggle
- In Europe, despite uncertainty, performance at hotels improved in 2H 2014. 2014 REVPAR: +3%
- Spain/Greece bounced back. Germany picked up through 2014
- Looking ahead, Europe still unclear. Not factoring in robust recovery for European business in 2015
- ME and Asia-Pacific will be a mixed bag in 2015.
- Thailand showing pickup in transient/group business
- Africa held back by low commodity prices
- HOT hotels outperformed its comp sets
- Core fees grew ~7%
- >60% of the rooms that entered HOT's system in 2014 were high end properties,
- >8% located internationally
- Net room growth below 4-5% target due to: longer development times in emerging markets, fewer in the year for the year conversions, and higher proportion of select service hotels with lower average room counts
- Plan to launch collection brand that will fit btw Luxury Collection and design hotels
- US strongest market, particularly in select-service
- Recent transactions with Aloft selling at prices well above their construction costs
- Accelerate growth in NA by growing Aloft, Element, and Four Points
- Expect to stay at or near target debt levels
- Spinoff vaca ownership:
- Conversion to asset-light
- Want to drive growth in SVO on its own
- Expect to place 5 hotels with the new company (key timeshare locations) - Los Cabos, Cancun, Puerto Vallarta, Sheraton Steamboat, Sheraton Kauai
- $20m EBITDA, valuing $200-250m asset sale value
- $400m headwind on leverage assuming they operate in 2.5-3x net leverage range
- Post spinoff -
- 75% of EBITDA (pre-SGA) will come from fees
- Expect to be well above 80% asset-light target in 2016
- Expect HOT to continue to look for ways to cut G&A
- HOT expects to receive new annual license fee of $30-40m from SVO
- Transaction related expenses not included in guidance
- Form 10Q filing in 2Q 2015
- Will achieve 80/20 asset-light model earlier than expected
- 4Q NA REVPAR: +5.8% overvall: REVPAR in South/West up 8% and 9%, respectively. However due to heavier mix in north region esp. NYC, adversely affected performance.
- Hawaii continue to be a challenge in face of lower demand from Japan due to weaker yen. Remixing business there by increasing focus on inbound travel from mainland US.
- Group revenue up 9% for business into all future years.
- Double-digit increase in revenue booked in the quarter for the quarter. December was largest group booking month in history.
- >70% of 2015 business on the books
- Nearly 60% bids in. Expect corporate rates in the mid single digits on average
- Grew share in South America despite volatile markets
- Q4 France REVPAR essentially flat
- Q4 Germany REVPAR: +5%; UK REVPAR: +3%
- Q4 mainland China REVPAR : +2.8%; austerity programs continue to impact the market there. North China remains weak
- SG&A increased 3% - at low end of revised range - due to better cost controls
- Closed 6 hotel dispositions including Sheraton on the Park, St. Regis Rome, Sheraton Ambassdor, and Philadelphia triplex.
- Net debt/EBITDA: 1.4x (2.9x based on S&P)
- ~950m cash located offshore
- In February, paid down CP balance by roughly 400m using cash
- 2015 guidance (before share repurchase)
- Core fees should grow 8-10% in constant dollars
- 42M EBITDA lost from hotels sold in 2014
- M&A market in 2015 remain hot. Expect to close transactions in 2014 that will generate proceeds in line with 2014 levels or $800m worth of hotels.
- Expect to return 550-600m in regular divs
- Expect to remain at high end of leverage range: 2.5-3x
Q & A
- 2015 REVPAR guidance was actually raised: difference btw systemwide and company-operated is only 30bps.
- Repatriation: Sees strong opportunity to return foreign sales back to US through next couple of years
- Acquisition focus not targeted at low end...probably in spaces they are currently competing today
- CFO guidance of $700-800m includes the capital going into SVO
- Share repurchase 2015 guidance: $300-350m
- Could move up leverage level in the future
- Seeing a little better Europe/ MEA. China is flat. North America going better.
- Owner feedback going in right direction in North America
- Feel good on Westin brand
- 2015: Good fee growth in North America (but not acceleration since many of the contracts haven't hit certain thresholds) but stronger international fees
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Takeaway: The precedent set by its SeatMe acquisition makes us question management's motivation behind the Eat24 acquisition.
- PAYING FOR A DISTRACTION: YELP is establishing a trend of questionable acquisitions following disappointing earnings releases (last quarter, it was two international acquisitions). Today, YELP purchased Eat24 for $134M ($75M in cash, remainder in stock). The company is guiding toward an incremental $36M in acquired revenues, although the actual contribution could be more (no historical Eat24 revenues provided).
- THE BIG QUESTION IS ACCOUNTING: Where will YELP account for its newly acquired Eat24 customers? For context, YELP acquired SeatMe back in 3Q13. Beginning in 2014, YELP discretely reclassified its SeatMe accounts as Active Local Business Accounts, and then stopped providing its total number of SeatMe customers beginning in 2Q14. In essence, YELP inflated its core advertising account metrics by including accounts paying for the reservation service it acquired. So, why should we expect anything different this time around?
For our most current thoughts on YELP, see the note below.
YELP: Shot Itself in the Foot (4Q14)
02/06/15 07:38 AM EST
Let us know if you have any questions, or would like to discuss in more detail.
Hesham Shaaban, CFA
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