HAIN is on the HEDGEYE Best Ideas list as a SHORT
We have just returned from three days of marketing in London. In short, there is a stark contrast between the investment communities in the UK and the U.S. when it comes to the outlook on HAIN. Basically, UK doesn’t get the hype over HAIN and the long-term opportunity. Ironically, during our visit HAIN management was also in London for a conference, management took many members of the UK investment community on a Tilda plant visit and a store tour.
Our summary thoughts from the people we met only confirm our SHORT thesis. Our view is that HAIN’s UK business is misunderstood by U.S. investors. Basically, HAIN’s UK business is nothing more than a private label business with a collection of non-organic brands.
Looking at the entire company, only 40% of HAIN’s products in the U.S. are “organic.” Therefore, looking at the U.S. and UK business in total, less than 30% of HAIN’s brands are “organic.” Having said that in the U.S. today, HAIN boasts that “99% of our products are GMO free,” which is not a bad thing but it’s not a long term competitive advantage. Why this roll-up story trades at a significant premium to other food companies is a complete mystery. Our sum-of-the parts suggest that there is close to 50% downside in the name.
The following are some comments from Irwin Simon Chairman, President & Chief Executive Officer, of HAIN at the UK presentation:
LOWER MARGINS FOR LONGER
Irwin Simon Chairman, President & Chief Executive Officer, HAIN - “So, don't look at us as our margins to be the same as every other food company out there because they're not going to be. But at the end of the day I'd love to see our EBITDA margins in the 15% to 18%, as we continue to scale our business, get efficiency, get SG&A efficiencies out there. And most important, is to get that top line growth, organic growth that can drive it down to the margin and bottom line level”
HEDGEYE – On one hand the CEO of HAIN says “don't look at us as our margins to be the same as every other food company out there because they're not going to be.” But then he says he want his EBITDA margins to approach 15-18%, which would look more like the companies he says “they’re not going to be.” Looking out to FY16-FY18, HAIN will be challenged to improve operating margins given the pressure on gross margins.
ACQUISITIONS ARE DILUTIVE TO MARGINS
Irwin Simon Chairman, President & Chief Executive Officer, HAIN - “We've done over 50 acquisitions. So, we have 6,300 employees around the world, 33 manufacturing facilities. As you heard me say before, our world headquarters in New York and these are where all our distribution centers are and all our manufacturing facilities.”
HEDGEYE – The best part of the HAIN roll-up story is in the rear view mirror. The last three acquisitions produce operating margins that are high-single digit versus the core U.S. business that is 17%. We expect that this trend will continue, making it nearly impossible for the company to generate 15% EBITDA margins.
HAIN IS GIVING BACK TO SHAREHOLDERS?
Irwin Simon Chairman, President & Chief Executive Officer, HAIN - “So, from Hain's standpoint, we're about brands, we're about people, we're about hug our customers, and at the end we're about returning money back to our shareholders.”
HEDGEYE – As far as I know the company does not pay a dividend. The company is also not returning stock to shareholders in the form of a stock buyback that reduces the outstanding share count. From my vantage point this is a throwaway line that suggests that the CEO will say anything to prop up the stock.
DON’T LOOK AT US QUARTER TO QUARTER
Irwin Simon Chairman, President & Chief Executive Officer, HAIN - “So I always tells people, don't buy Hain if you want to look at us quarter-to-quarter. You've got to look at the 20 years of growth. You got to look at the industry and look where we're growing. On our last conference call, we've discussed over 100,000 new points of distribution, which will drive consumption.
HEDGEYE – Why should we not look at HAIN quarter-to-quarter? Right, it’s all about the big picture. The big picture says that less than 40% of HAIN’s products are organic. Also, why is 100,000 points of distribution good news? What if it should have been 200,000? The new 100,000 points of distribution is on a base of what?
Irwin Simon Chairman, President & Chief Executive Officer, HAIN – “So if you go back and you look at my slide right here, basically, that is $3.5 billion in 2018 and if you look where we're going to end the year this year, $2.7 billion, if you annualized your acquisitions, we're close to a $3 billion business. So growing 7% to 10% organically is what we're looking for but we – this year, we did three acquisitions. We're looking to do at least $100 million in acquisitions each year and that's something around the world I think we can do.”
HEDGEYE – The HAIN CEO is on record saying that the company will show 7-10% growth organically thru fiscal 2018. That would be unprecedented growth for any company, let alone a food company. Given that the UK business looks more like a traditional food company, with 1-2% organic growth (maybe). This suggests that the U.S. and the rest of the world will need to grow 13-14% to offset the slower growth in the UK. Also, on a base of $3.0 billion in revenues, $100 million in revenues does not move the needle for HAIN any more. Trading at $62 the stock fully discounts the company’s ability to generate $3.5 billion in sales and $2.45 in calendar 2018 EPS.
The following two charts show HAIN UK revenue and operating profit growth for the next 5 quarters. Needless to say, this looks like mature food company and not a company growing 7-10% organically.