Even as someone who isn't all that interested in the “healthy lifestyle” trends of today, I find it interesting to see the sort of visceral reactions that stocks like Hain Celestial (Nasdaq:HAIN), White Wave (Nasdaq:WWAV), and Annie's (Nasdaq:BNNY) provoke in investors/readers. In particular, there appears to be a very vocal percentage out there that are just incensed over the valuation and attention these stocks get and absolutely insistent that healthy/organic eating is just a fad.
Whether it's a fad or not (I happen to lean toward “not”, even though I don't participate), there's no question that these stocks have generated some sizable expectations on the Street. As one of the veterans of the sector, Hain Celestial is a good case in point – today's valuation already more than incorporates assumptions that Hain will significantly outgrow the packaged food sector and generate above-average long-term profits. So much so, in fact, that I find it hard to see how the company can live up to (or grow into) these expectations.
Strong Results Clearly Don't Hurt
Hain Celestial did no harm to the stock's cause with fiscal four quarter earnings that slightly exceeded both top and bottom line expectations.

Revenue rose 32% as reported, good for a small (2%) beat versus the average of Street estimates. U.S. sales rose almost 18%, while acquisitions helped U.K. sales to more than double. Rest of World revenue increased 11% for the period. Stripping out acquisitions, management indicated that organic revenue growth was in “high single digits”, a figure that broadly meshes with the Nielsen data from the quarter. 
Hain's margins were better, but still need to improve further. Gross margin rose 40bp on an adjusted basis, while adjusted operating income rose 37% and the adjusted operating margin rose 40bp. These numbers looked slightly below expectation, though, and Hain Celestial beat the bottom-line EPS estimate with the help of a lower than expected tax rate.
Growth Versus Operating Leverage
Hain Celestial has been a strong grower for a while now, as a combination of internally-driven organic growth (both product introductions and expanded distribution) and serial acquisitions have led to nearly 14% compound annual revenue growth over the past decade. With that, company brands like Arrowhead Mills, Terra Chips, and Greek Gods can be found in most retailers, including Whole Foods (NYSE:WFM) as well as Wal-Mart (NYSE:WMT), Target (NYSE:TGT), and Kroger (NYSE:KR).

SEE: How To Eat Healthy Food And Save Money
While the growth has been respectable, the company still has work to do on the margins. The company's return on invested capital has never grown past the mid-single digits, free cash flow growth has lagged sales growth, and the company's gross and operating margins are still below established grocery players like Kraft (Nasdaq:KRFT) and Kellogg (NYSE:K). It's all well and good to talk about the above-average growth potential of natural/organic packaged foods, but that enhanced growth is literally not worth much if the margins are always going to lag.
It's also worth noting that natural and organic foods have increasingly attracted the attention of larger established packaged goods company. Smucker (NYSE:SJM) recently announced the acquisition of another natural/organic company (Enray), and others like Kellogg, PepsiCo (NYSE: PEP), Campbell Soup (NYSE:CPB), and General Mills (NYSE:GIS) own organic brands as well – and can often use their existing manufacturing and distribution capabilities to good effect.
The Bottom Line
I don't believe Hain Celestial has to worry about being outmaneuvered by established packaged food companies so much as whether management can drive enough growth and margin improvement to satisfy the expectations already factored into the stock's valuation. At today's price, Hain Celestrial already needs to grow cash flow at a high teens rate just to be “fairly valued”, and that doesn't leave much room for error. With that, it's hard for me to be all that positive on the shares, though I won't be surprised if strong revenue growth keeps the margin concerns at bay for at least a little while longer.
Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center