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Hain Celestial Group Inc

HAIN: NASDAQ

Hain Celestial manufactures and distributes organic and natural products to retailers in the U.S. and the U.K. It has a broad portfolio of products in grocery, tea, snacks, personal care and protein. The company was founded in 1993 and has grown significantly from $15 million in sales at its founding to $2.9 billion today. [1] Ninety-nine percent of products are non-GMO and forty percent are certified organic. [2] Brands include, among others, Hain Celestial Tea, Terra Chips, Earth’s Best and Greek Gods.

Investment thesis

We observe people becoming much more aware of what is put into their bodies and as a result are experiencing a renewed focus on quality, organic and natural foods. Hain was a pioneer in the organic and natural foods space and has benefited over the years, as evidenced by its organic sales growth in the high-single-digit to double-digits range for many years. [3] We believe this trend towards organic and natural foods will continue as the non-GMO and organic categories are still only three percent and two percent, respectively, of the overall food space and are expected to grow about ten percent a year. [4] Millennials seem to be the leading generation of this trend and will most likely be starting families soon, which we think should drive growth going forward as they purchase for their kids.

Confirmation through research

Our research confirmed that Hain has strong brands, an economic moat that protects its business and margin opportunity, which we believe will drive future growth and could even attract a buyer. Talks with industry experts, and past organic sales growth, gave us confidence in the strength of Hain’s brands. [5] We found that organic products are difficult to source, require strong supplier relationships, are heavily regulated and must meet strict standards, which provide a nice moat around the business. [6] When we first looked at Hain, the stock appeared to be down due to temporary issues affecting four brands. [7] The company implemented an aggressive action plan and is starting to see improvement. [8] Our research also uncovered what we believe to be a significant opportunity for margin expansion within Hain through supply chain and SKU (number of stock items) rationalization, innovative packaging and higher investments in marketing, which could provide upside to industry growth.

Lastly, we believe large food manufacturers experiencing slow growth will be eager to enter the fast growing organics and natural foods space. Given Hain’s strong brands, it could sell the business in parts or whole. Recent transactions in the space, including WhiteWave, Diamond Foods and Annie’s, have been at significant multiples, well above where Hain currently trades. [9] Hain’s stock had also been under pressure due to an accounting issue related to the timing of revenues. After the external auditors reported no wrongdoing, we felt comfortable making a position. [10]

Variant Perception

We have followed Hain for about a year, tracking its progress tackling those temporary issues and speaking with industry experts as well as fellow Hain shareholders, which has given us greater confidence that this will be a bigger business in the future. We believe that Hain has strong brands and will continue to grow with the overall organic and non-GMO categories with margin expansion further adding to earnings growth over time.