In this video from Market Foolery, Chris Hill, Taylor Muckerman, and Jason Moser discuss the recent headaches and path forward for Hain Celestial (NASDAQ:HAIN) after the company postponed the filing of its 10-Q as the Securities and Exchange Commission investigates its financial reporting. Whether this is the result of a simple oversight or a more serious problem, investors will have to wait and see, but the company's brands are still performing well.
A full transcript follows the video.
This podcast was recorded on Feb. 13, 2017
Chris Hill: Hain Celestial Group is the parent company of a bunch of different organic food brands. Shares are hitting their lowest point since 2013, because the company disclosed that the accounting practices at Hain Celestial are being investigated by a little group we like to call the SEC.
Jason Moser: That's not the football conference. This is the ...
Hill: That is not the football conference.
Moser: ... SEC that monitors everything basically that goes on in these markets. On the surface, yeah, this looks not good. The time of this filing, I hate it when companies do this. They threw this filing out there Friday afternoon after the market closed that their 10Q was going to be late and that the SEC had launched this investigation.
Even if there is absolutely no wrong doing here whatsoever, that may be the case. Let's be very clear. You hate to see, when filings like this happen, is simply the perception is that they're throwing something under the radar there. Perception, in many cases ...
Hill : Optics are powerful.
Moser: Exactly. Perception really matters. This goes back to something that was going on in the latter half of 2016 where there were some questions as far as revenue recognition. I think some potential concessions they were giving to distributors and how that all flowed through the financials. Ultimately, they had done a third party audit, which revealed no wrong doing. Everything seemed to be in order.
This recent news tells us that the SEC opening this investigation perhaps is just the SEC doing its job. Taylor said, right before the taping, Taylor noted that. He was like, "Maybe this is just the SEC doing its job." I tend to agree with that. I think this may just be a situation where it's more process than actual problem.
We may be looking at some restatements here at a minimum. Then, all of a sudden that brings everything into question regarding what the market has been willing to pay for the stock up to this point based on expectations out there that may have been off base.
I think it's important to note here too, though this is an issue that is not a brand problem. This is not like a Chipotle situation where they have to go out there and focus on brand recovery crisis management. In fact, I would be willing to bet that 99.9% of the consumers are not going to have any idea what this means, or that it's even happening.
Hill: You might recognize some of the brands themselves, but ....
Taylor Muckerman: He'll recognize Hain Celestial.
Hill: Hain Celestial is not appearing on the packaging.
Moser: Exactly. They have a bunch of brands that you find in your ...
Moser: ... grocery stores from Whole Foods to Giant and everywhere in between. Let's not forget the success that's led up to this point. This is a very successful business to this point, grown revenue at a nice clip, it's profitable, it's cash flow positive. For a growth company, that's a big deal. A lot of these growth companies it takes forever to get to profitability.
I like the fact that they're selling food. That's a good repeat sales business there. The founder and the CEO there, Irwin David Simon, he's been around for a while. He's been the CEO of this business since 1993. He owns a pretty good slug of shares. He's vested in this.
Yeah, it looks bad today. Probably pretty easy to make fun of. In all honesty, I have a hard time believing that this stock has not recovered from this over the course of the next year to two years. Of course, unless the SEC digs up some serious wrong doing, I'm inclined to believe that probably won't happen based on the independent third party audit that has already happened. I tend to think like what Taylor said. "This may just be a situation where the SEC is doing its job."
Hill: I don't know.
Moser: Chris doesn't seem to be ...
Muckerman: A dubious look on his face.
Hill: Here's the thing. This is not a company I follow very closely. I read an article. Brian Stoffel, one of our writers here at the Motley Fool had written, about a month ago. He had owned Hain Celestial for some period of time, sold it in early 2016 and basically wrote this article in mid-January saying, "Look, I've never shorted a stock before, but I think I would consider it in this case," and raised a couple of red flags. This is before the delay of the 10Q called out the accounting stuff that you had mentioned, Jason.
Also, called out that if you look at overall management and throw in the board of directors, there's not a ton of skin in the game that the leadership has. They've got some stake in the company, but not necessarily as much as you would expect given that Hain Celestial is not a $20 billion company.
The market cap at this point is, I think around $3 billion, or something like that. I don't know. I think it's one of those things where if this were the first time this were happening; if this were the first indication of any kind of ... I'm not trying to pick on Hain Celestial. I think just any company, the first indication of, "You know what? We might have some accounting issues," maybe you give them a pass.
Muckerman: Yeah, that ...
Hill: This ain't the first time.
Moser: I don't like it when my companies are under SEC investigation. I think that there are always ... No company out there is perfect. We can sit there and nitpick any of them. Red flags, aside. I don't look at founder leaders, for example, and say, "The founder's the CEO and he's been in there for ..." That doesn't make it a good investment.
Those are qualities we like to see, but it doesn't necessarily mean it's a good investment. I certainly don't mean to imply that's the case here. This is a pretty simple business, though. They sell food.
It's not like you're amortizing a bunch of software over the course of the ... You're not setting up capital leases. You don't have to capitalize a bunch of stuff on the balance sheet to make this thing work. It is a pretty simple business to understand how the financials work.
Again, it's entirely possible there could be some outright fraud here. I don't lean in that direction simply because it would be very difficult to really cover that up with this type of business. You know what I mean?
Muckerman: There's not as many dark corners on the balance sheet and the income statement, yeah.
Moser: Yeah, this is not like Goldman Sachs .
Hill: I was going to say there's no black box that they're selling.
Muckerman: There's Cayman Island holdings.
Moser: I'm not a shorter either. I don't think I've ever shorted a stock other than just with my mouth. I would look at this and think I would prefer just to not invest in it versus shorting it. I understand this is trepidation. I look at this thing and think, "Yeah, there's some red flags." You hate to see this kind of stuff happening. If it was ongoing, I think, this is basically a continuation of the same thing.
Again, worth keeping an eye on. I don't know that I would necessarily go out there and just say, "Hey, this is a buying opportunity." This is a business that has been successful up to this point. It is a simple business to understand. The founder does own close to 2% of shares. To me, that's pretty significant. He's got a lot of money tied up in this thing. There is a lot of consolidation going on in this industry. We saw WhiteWave not too terribly long ago.
Muckerman: Yeah, yeah.
Moser: It's one to definitely keep an eye on. I wouldn't use this headline today and think, "You just got to get out of this stock and it's not worth your time." I don't think this is that drastic yet.
John Mackey, CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Chipotle Mexican Grill and Whole Foods Market. Jason Moser owns shares of Chipotle Mexican Grill and Whole Foods Market. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill, Hain Celestial, and Whole Foods Market. The Motley Fool has a disclosure policy.