Morningstar | U.S. Turnaround Plan Should Steady No-Moat Hain; Shares Moderately Undervalued. See Updated Analyst Note from 20 Mar 2019
We are lowering our fair value estimate for no-moat Hain Celestial to $26.50 per share from $29 due to a significant second-quarter shortfall and a restructuring plan that will eliminate a material portion of U.S. stock-keeping units, resulting in a 12% drop in U.S. revenue over the next few years. That said, we think the strategy is prudent, as it should allow the company to focus resources on the highest-potential products and should improve margins and operational execution by eliminating onerous complexity.While Hain operates in the fast-growing health and wellness space, its performance has been disappointing, in the U.S. market in particular, where numerous brands, SKUs, categories, and channels have caused operational complexity and spread company resources too thin, resulting in underinvestment in brands. This has led to limited brand awareness, pricing power, market share, and brand equity for Hain’s portfolio, thus our no-moat rating.
Competitive pressures are unlikely to subside, particularly as leading national branded operators seek to offset the sluggish growth prospects of the domestic packaged food landscape. However, we believe Hain's new strategy will improve profitability, freeing up resources for higher investments in marketing and research and development, which should aid brand awareness and allow the company to launch differentiated, compelling products into the marketplace. We expect these changes to stabilize U.S. market share after a few years of losses. As a result, we are increasing our long-term U.S. revenue growth forecast to the midsingle from the low single digits, which takes our consolidated long-term revenue growth expectation to 4.3% from 3.6%. We expect the cost and mix improvements to boost gross margins over the long term, which we’re increasing to 28% from 23.5%. However, this should be offset by higher marketing and R&D, so we’re maintaining our 13% operating margin forecast.
Hain Celestial Group manufactures, markets, distributes and sells organic and natural products. The company sells its products in the following categories: grocery, which includes infant formula, infant, toddler and kids foods, as well as other food products; snack products, which includes a variety of potato, root vegetable and other vegetable chips, straws, tortilla chips, whole grain chips, pita chips and puffs; personal care, which includes skin, hair and oral care, deodorants, baby care items, body washes, sunscreens and lotions; and tea, which provides varieties of herbal, green, black, wellness, rooibos and chai tea.
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