Takeaway: Less than 30% of HAIN’s brands are “organic”
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.
In this one-minute excerpt from today's edition of The Macro Show, Hedgeye CEO Keith McCullough lampoons government number crunchers who change the calculations when they don’t like what the numbers reveal. Don’t like the results? Just move the goalposts!
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Takeaway: Claims continue to show strength, posting the best numbers since April 15th, 2000.
This research note was originally published May 21, 2015 at 09:44 in Financials. Click here for more information on Hedgeye and how you can become a subscriber.
Seasonally adjusted jobless claims came in at 274,000 last week, slightly higher than expectations for 270,000. Even with the slight miss, this is a strong print. The rolling 4-week Seasonally Adjusted (SA) figure dropped to 266,300. This is the lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266,300.
In the first chart below, the 4/15/00 data is circled in red. It is important to bear in mind, though, that that date also corresponded to the peak in equities two cycles ago.
In the second chart below, indexed claims in energy heavy states improved more than the country as a whole in the week ending May 9th. The spread between the two series fell from 25 to 21.
Initial jobless claims rose 10k to 274k from 264k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.5k WoW to 266.25k.
The 4-week rolling average of NSA claims, another way of evaluating the data, was -16.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -14.2%
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
FOR IMMEDIATE RELEASE
STAMFORD, Conn., May 22, 2015 -- Hedgeye Risk Management, one of America’s leading independent investment research and media companies, announced today the official launch of The Macro Show, a live, fully interactive morning market discussion hosted by CEO Keith McCullough and analysts from the firm. The show distils the most significant market and economic developments and is followed by a live Q&A session featuring questions submitted from subscribers.
“By far, the most precious asset allocation for investors today is time. My team and I recognize this and created a product that delivers a ton of value in less than thirty minutes,” said CEO Keith McCullough. “Global Macro risk is dynamic, non-linear and constantly changing. My primary job as a risk manager is to prepare my subscribers as best I can and get in front of them everything they need to know before the market opens.”
Hedgeye has hosted a morning macro conference call exclusively for its institutional investor customers since the firm's inception. Each show takes a close look at current asset allocation, followed by McCullough’s “Top-3 Things” that matter most in the markets, the “Grind” (a systematic look at various key market levels) and a brief market commentary. Each show concludes with a question and answer session. The introductory price is $39.95 for a monthly subscription.
“With the introduction of the Morning Macro show, HedgeyeTV is not only launching its first premium subscription product, but we are also opening up to the wider investing community a hallmark event in the day of many hedge fund and Wall Street investment firms,” said Hedgeye President Michael Blum. “For the first time ever, smaller investors are now able to see what happens behind closed doors at Wall Street firms on every trading day.”
HedgeyeTV was launched in 2013 and produces daily video content, including programs such as Real Conversations which has featured notable guests including investor Mario Gabelli, national bestselling “Currency Wars” author James Rickards, Jim Grant, founder of Grant’s Interest Rate Observer, Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. and Stephen Roach, Yale University professor and former Chairman of Morgan Stanley Asia.
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Client Talking Points
Just an awesome Retail Sales print of +4.7% year-over-year out of the UK this morning (to put that in context, with the same weather, the U.S. posted a 0.9% year-over-year Retail Sales # in April). The Pound is up +0.7% on that to $1.56 vs USD and looks as good as any currency on our screens right now.
The Euro held the low-end of our $1.10-1.15 risk range and is up +0.5% vs. USD this morning after A) dovish Fed Minutes and B) Hilsenrath parroting the same in the WSJ – this is the headwind to shorting Euros into the June 17th Fed Meeting, a Lower-For-Longer Fed; German data continues to slow.
Global Yields are trading like Pac-Man still but lower-highs remains the longer-term picture. The UST 10YR dropped -3bps to 2.22% this morning and really has no support to 1.97%; German, Italian, and Spanish 10YR Yields all -2-3 basis points as the ECB has front-loaded its QE to May-June.
|FIXED INCOME||26%||INTL CURRENCIES||2%|
Top Long Ideas
One way to invest in Lower-For-Longer, from an equity perspective, is being long U.S. REITS (VNQ). The reality is that we are in a #LateCycle slowdown and the jockeying around each incremental data point will continue to get more and more intense as the Fed’s only ammo for suspending the cycle that has unfolded many times over is to push out the dots on a rate hike. #LowerForLonger.
The ITB turned in modest positive absolute and relative performance in the latest week as the advance in interest rates ebbed and the high frequency mortgage purchase application data continued to reflect improving housing demand trends. This is a data heavy week for housing. NAHB Builder Confidence dropped for the 4th time in 5 months, dipping -2pts sequentially in May to an Index reading of 54. Confidence currently sits +9 pts higher than May of last year and is basically right on the average reading of 55 observed over the last three expansionary periods. Further, at the current reading of 54, the index remains well above the Better-Worse Mendoza line of 50, signaling builders continue to view conditions favorably.
The counter-TREND moves in the USD and commodities have been extensive and now confirmed: 1) U.S. Dollar: Down another 1.20% week-over-week to complete its BULLISH to BEARISH TREND Reversal. The dollar is now BULLISH on a TAIL duration (three years or less) and BEARISH on a TREND duration (3-Months or more) 2) CRB Index: +2.0% week-over-week and +5.5% 1-Month Change. The CRB is now BULLISH on a TREND duration and BEARISH on a TAIL duration.
Three for the Road
TWEET OF THE DAY
GOLD: still looks good +0.1% to $1210/oz this am - no resistance to $1240 $GLD
QUOTE OF THE DAY
There is no royal road to anything. One thing at a time, all things in succession. That which grows fast, withers as rapidly. That which grows slowly, endures.
-Josiah Gilbert Holland
STAT OF THE DAY
Australians are the most confident they’ve been since January 2014 after the central bank cut interest rates and the government announced a A$10 billion ($7.9 billion) boost for families and small businesses.
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