Is Hain Celestial a Good Buy?

Hain Celestial has done exceedingly well to benefit from the growing consumption of organic food, and its year-to-date share price increase of 55% is proof. It has also outperformed fellow organic food player Annie's on the back of its diversified product line and geographical reach. Looking ahead, Hain can continue its outstanding run as it has been making some good moves to grow its business.

Acquisition-driven growth
Hain's growth has been driven by acquisitions. Last year, it acquired Premier Foods to expand in the United Kingdom. This quickly positioned Hain in the top 40 food and beverage suppliers in the U.K. The demand for organic food and beverages in the U.K. has been increasing, according to the Soil Association . This is a positive development for Hain going forward, as it derives 25% of its sales from the U.K.

The increase in demand for organic food and beverages in the U.K. is also reflected in Hain's recent results. Revenue in the U.K. increased 96.7% from last year to $114 million, and Hain has been working to further strengthen its position in this market .

In December of last year, Hain acquired the BluePrint Juice brand to capitalize on the rapid growth of the brand's signature line which is sold at a number of natural and gourmet retailers including Whole Foods and Dean & Deluca. Hain Celestial is Whole Foods' biggest supplier .

In May this year, the company purchased Ella's Kitchen Group, a maker of organic baby food with 80 products offered in the United Kingdom, the United States, and Scandinavia. As per figures (for current year till mid-August) from Nielsen, organic babyfood remains dominant in its category with 57% share of trade in the U.K. This single category could be an important growth driver for Hain going forward.

Hain Celestial experienced solid sales growth across new brands acquired after the first quarter of fiscal 2013, including Hartley's, Sun-Pat, Gale's, Robertson's, and Frank Cooper's. As a result, Hain's total revenue grew 32.7% year over year to $477.5 million in the previous quarter, and adjusted earnings per share soared by 26.8% year over year.

A look at industry dynamics and competition
Competition is building in the organic food space. As a result of growing popularity of organic food and beverages, even supermarkets such as Wal-Mart are carrying an ever-increasing range of organic food product lines. Food companies such as General Mills are also moving into this space to intensify the competition.

This is why an early mover like Annie's slowly started losing its advantage as other players like Hain Celestial started catching up.

HAIN Revenue (Quarterly YoY Growth) Chart

HAIN Revenue (Quarterly YoY Growth) data by YCharts.

In the second quarter of fiscal 2014, Annie's top-line growth was much lower than Hain Celestial's 32.7%. It clocked revenue of $57.9 million and adjusted diluted EPS of $0.28 versus $0.24 last year .

Annie's continues to make excellent progress to build its brand, though, putting forth effort to expand the distribution of its 33 most important food items. Going forward, Annie's is banking on this initiative to drive further growth since most groceries only carry 13 of its key 33 items on average, despite the company's best efforts. This has lead to shallow distribution.

Much like Hain Celestial, Annie's is also encouraged by strong industry trends in organic and natural food. It announced the planned acquisition of a plant in Joplin for $6 million, plus the cost of inventory and supplies from a subsidiary of Safeway.

The Joplin plant has been the primary manufacturer of Annie's cookie and cracker products since the introduction of Cheddar Bunny more than 10 years ago. This acquisition will help Annie's to go after the snack business, and it will also become a contract manufacturer for Safeway for three years post the acquisition.

With organic and natural food items being sold at almost all large groceries, retailers, and supermarkets, their growth will benefit players like Hain Celestial and Annie's. Wal-Mart, for example, has been expanding internationally, particularly in emerging economies through new stores and accretive acquisitions. Whole Foods is also eyeing international expansion into Canada and the U.K. and sees the potential to almost triple its store count.

In addition, the organic food market is still only a small percentage of the global food market. As per FarmExchange, the organic and natural food market in the U.S. in 2012 was just 3.5% of total U.S. food sales . This presents a good opportunity for growth.

It is because of such an enticing opportunity that players like General Mills are entering this space. General Mills is looking to buy its way into the organic food market with acquisitions like Yoplait and Yoki Alimentos. These two acquisitions have certainly helped General Mills' growth; Yoki has been the primary driving force behind its Latin American sales, and Yoplait has been doing well in Canada.

General Mills has also been focusing on reducing the sodium content in its food offerings. It intends to reduce sodium in its top 10 product categories by 2015 by 20 %.

Bottom line
Hain looks well-armed to take on its competition. The company plans to launch 50 new products by the year's end, and its presence across various countries should help further its growth. On top of that, Hain is much cheaper than its direct peer Annie's, which makes it a sweeter deal for potential investors looking to benefit from the organic food wave.

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Ayush Singh has no position in any stocks mentioned. The Motley Fool recommends Hain Celestial. The Motley Fool owns shares of Hain Celestial. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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