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Hain Celestian (HAIN) Hit as Glaucus Comes Out with a 'Strong Sell'

February 21, 2013 11:05 AM EST Send to a Friend
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Price: $86.83 +1.38%

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    7 Buy, 2 Hold, 0 Sell

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Hain Celestial Group, Inc. (NASDAQ: HAIN) is seeing some pressure after Glaucus Research Group initiated coverage with a 'Strong Sell' rating.

According to the firm, "THE HAIN CELESTIAL GROUP, INC. (“Hain” or the “Company”) is a $3 billion roll-up of disparate food brands that we believe is masquerading as a healthy/organic food company. In this report we present compelling evidence (based on independent lab tests and other due diligence) suggesting that products representing 85% of the Company’s 2012 internal growth are beset by quality control issues and/or deceptive marketing practices. We believe that once the Company’s exaggerated claims are exposed, Hain will revert to its historical internal growth rate of 3% and eventually trade in-line with mature packaged goods companies at a 15.5x forward p/e multiple. As Hain currently trades at 24x forward earnings, this implies downside of about 35%."

The firm highlighted:

1. The Sinking Flagship. Celestial Seasonings is Hain’s flagship brand and also one of its most profitable product lines. It is built on the perception that its teas are healthy. As consumers, we decided to verify such claims by sending eleven of the Company’s popular teas to Eurofins, an accredited and independent lab that is the global leader in drug and food testing. Lab tests showed the following:

a. Tea Samples Violate US Law. 91% of the Celestial Seasonings’ teas we tested violated U.S. pesticide standards (CFR 40 section 180), meaning such teas are ‘adulterated’ under the FDCA and subject to federal regulatory action. All violative samples contained traces of known or possible human carcinogens.

b. Children’s Tea Sample Contained Traces of a Known Carcinogen. Independent lab tests revealed that the Celestial Seasonings’ Sleepytime Kids Goodnight Grape Herbal Tea sample contained 0.26 ppm of Propachlor, a known carcinogen for which there is no safe harbor limit established under California’s Proposition 65.

c. Repeat Offender. The FDA has issued two prior Warning Letters to Celestial Seasonings for quality control issues. Given our test results, we expect further regulatory scrutiny.

2. Nectar of the Gods? Hain markets Greek Gods Yogurt (responsible for an estimated 37% of its internal growth in 2012), as an ‘authentic’ Greek-style yogurt. We believe this marketing to be deceptive because Greek Gods contains only one-third of the protein and 400% more fat when compared with ‘authentic’ Greek style-yogurts such as Chobani. Consumers are catching on, and sales growth is sharply decelerating.

BUSTED GROWTH STORY

3. Non-‘Organic’ Growth Rate. Hain has masked anemic internal growth through serial acquisitions and discontinued operations. If you back out acquisitions and accounting gimmicks, we estimate Hain's sales averaged 3% internal growth between 2000 and 2011. This compares unfavorably to a 12% average internal growth rate for the U.S. natural and organic food category as a whole.

4. The Party is Over. Hain’s estimated 7% internal growth rate in 2012 was driven primarily by Greek Gods Yogurt and Sensible Portions (Veggie Straws). Sales growth of both products appears to have rapidly decelerated in recent months. Excluding these products and the troubled Celestial Seasonings line, we estimate 2012 internal growth increased by only 1%, which is more comparable to a mature packaged goods company (3%-4% growth) than a leader in organic and natural foods (10%-20% growth).

INSIDER SALES

5. Simon Says, Simon Sells. During the last 21 months, Hain CEO Irwin Simon took advantage of a temporary boost in Hain’s share price to dump almost $33 million of stock. Worse still, Simon sold his stock in eleven tranches, all of which began within hours to 28 trading days after Simon appeared on CNBC to tout the growth prospects of his Company.

Valuation. A likely reversion to Hain's historical internal growth rate of 3% suggests that the Company’s stock should trade in line with mature packaged food companies with similar growth profiles, not healthy/organic food comps. A 15.5x forward p/e implies a stock price of $38, around 35% below today's stock price of ~$58 per share

Link to Full Report

Shares of HAIN are down 2.4 percent mid-day to $56.68,




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