Hain Celestial (HAIN -2.21%) seemed like a perfectly positioned company. As consumers learned more and more about where their food came from, the organic movement only became more powerful.
That's why, in November 2014, I invested my own money in the stock. But as I did more research on the company, I became wary of a narrowing moat. When I sold my shares in January 2016, it was long before accounting issues and an SEC investigation were brought to light, sinking the stock even further this week.
Image source: Getty Images.
A questionable growth strategy
As I gained more experience as an investor, I began to look very skeptically at the growth-via-acquisition strategy. While there are certainly success stories, the graveyard of value-destroying acquisitions is constantly growing.
Hain is the poster child for this strategy. Under the leadership of founder and CEO Irwin Simon, the company has grown by buying up popular organic brands that had made a name for themselves independently. With the cash and scale that Hain could provide, the thinking went, these brands could flourish on a national and international platform that would otherwise take decades to accomplish.
The problem is, you have to have an excellent system in place to manage all of the disparate businesses, and it seems Simon did not have such an infrastructure. One review by a former employee on Glassdoor.com offered a detailed warning back in October 2015:
Having a young, natural product brand adhere to a strict corporate budget can be detrimental to its survival. On several acquisitions, Hain failed to achieve continued rates of growth on behalf of the acquired brand mostly because it could not fund new projects... Hain's current acquisition model essentially operates on limiting up front costs as much as possible; they slim down an acquired brand's team to the bare minimum, which only allows for the brand to sustain rather than grow its market segment.
That's crucial, because if the brands that Hain is acquiring don't produce the type of growth that the company expects, it means that it likely overpaid for them in the first place. This eventually leads to significant goodwill writedowns.
As you can see below, the company's goodwill -- and long-term debt -- has been growing steadily over the past six years.
Data source: Hain Celestial annual and quarterly reports.
We have no idea if even these numbers are correct
With that as the context, we can fast-forward to last summer. As investors were preparing to review the company's annual report, Hain said it would not be able to file in a timely manner. At the time, the company's statement seemed benign: "the Company identified concessions that were granted to certain distributors in the United States," and it simply needed to clear up the matter.
Indeed, in November, it appeared it might be in the clear. A release stated that the company "found no evidence of intentional wrongdoing in connection with the Company's financial statements."
The problem, however, is that quarterly filings have been besieged by delay after delay. It has been over 285 days since the company last published financial statements, over 180 days since the accounting issues were first disclosed, and 90 days since an apparent "all clear" was issued, signaling no intentional wrongdoing.
That's a long time with absolutely no information for investors to digest. And this week, things seemed to worsen. The company said in a post-market Friday news dump that the scope of its own investigation was widening and that it wouldn't be providing the missing quarterly reports promptly. It also said that the SEC had opened a formal investigation, though when it started is not certain.
Putting it all together
So what are we left with? It's impossible to value the business based on traditional metrics. We have no idea how accurate the numbers from the past are, and we have absolutely no data to go on over the past three quarters.
Using the last four quarters that we do have, the company now trades at 17 times earnings and 21 times free cash flow. If it turns out that there's nothing nefarious about what it's been doing and the brands are stronger than I'm giving them credit for, it would make today's prices seem pretty fair. However, with uncertainty reaching a fever pitch, investors need to accept that this is as much a guessing game right now as anything else. Proceed with caution.
