Icahn Adds to Hain Celestial Stake

 | Nov 19, 2012 | 4:30 PM EST
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According to a filing with the Securities and Exchange Commission, billionaire activist investor Carl Icahn has further increased his stake in Hain Celestial Group (HAIN) by purchasing 75,000 shares of the stock on Nov. 14 at an average price of $58.97. Icahn has been interested in the $2.8 billion market cap provider of natural and organic foods for some time. Our database of 13F filings shows that he has had a large position in the company for at least the last year and a half (research Icahn's activity in Hain Celestial over time and see what his top picks are now).

In September, we reported on an insider purchase at Hain Celestial, with a board member buying 1,000 shares at an average price of $68.02 (learn more about the insider purchase). While Icahn Capital Management had the largest position in Hain Celestial at the end of September out of all the hedge funds and other notable investors tracked in our database of 13F filings, Tiger Cub Philippe Laffont's Coatue Management had more than doubled its stake to a total of 1.9 million shares.

Hain Celestial's sales were up 25% last quarter compared to the same period in 2011. Much of the growth came from Europe as the company acquired assets in that market, but even in the U.S. (which is by far the largest market, at 70% of sales in the quarter) revenue grew by 8%. Thanks to an improvement in margins, the growth rate of net income was somewhat higher at 40%.

The financial community expects a continuation of these high growth rates. At its current valuation, Hain Celestial trades at 34x trailing earnings, suggesting that investors are depending on rapid improvement (which is at least possible given Hain's focus on organic and natural foods). Sell-side analyst consensus is for $2.85 per share in earnings for the fiscal year ending in June 2014, compared to $2.42 in the current fiscal year (and, in turn, $1.86 in the last fiscal year, though as we've noted there have been some acquisitions). That yields a forward price-to-earnings multiple of 21, which is still high. So Hain would have to turn in strong growth rates for several years in order to prove undervalued at current prices.

Hain's peers include General Mills (GIS), Mondelez International (MDLZ), B&G Foods (BGS), and TreeHouse Foods (THS), though none of these companies has as pure an exposure to the trend in natural and organic foods. Partly because of this, only B&G and TreeHouse have trailing PE multiples of more than 20, and these are in the 21-22 range. B&G, which manufactures a number of products including Mexican food ingredients, has been seeing high earnings growth and can justify its valuation on that basis (it also pays a dividend yield above 4%). It might be a good stock to investigate further. TreeHouse has been reporting about flat revenue compared to a year earlier, and net income has been down sharply. We'd avoid it.

The larger food companies have trailing and forward PE multiples in the low to mid-teens. Mondelez, which manages many of the former Kraft Foods (KFT) brands in international markets, has at least temporarily been seeing lower numbers (this is likely at least partly due to changes at the corporate level); General Mills' earnings were up strongly last quarter. These large-cap consumer staples companies are also quite defensive, with General Mills being particularly notable for its beta of zero. They look like better values than Hain to us, though we'd want to dig deeper into Mondelez's financials before buying that stock.

To buy Hain, as Icahn is doing, it's not enough to be confident of high growth in demand for natural and organic foods. The current valuation has high earnings multiples already, capturing a large expected increase in earnings. As a result, we're skeptical that investors are best served by investing in the company.



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