The organic food industry has been growing at a terrific pace. Transparency Market Research states that the global organic food & beverages market is expected to grow to $187.85 billion by 2019, from just $70.7 billion in 2012. As such, it is quite natural to expect the competition to heat up in this space, with the likes of Hain Celestial (NASDAQ:HAIN) and General Mills (NYSE:GIS) fighting for a piece of the pie.
Among the companies in this space, Hain Celestial looks to be one of the most promising players. The company has delivered consistently solid revenue and earnings growth in the past couple of years, and its diversification across the globe is one of the primary reasons it is well placed to benefit from the organic food market. So, the weakness in Hain Celestial's shares after it reported its second-quarter results earlier this month is a good opportunity for investors to get into this growth story.
Looking beyond the weakness
The earnings report wasn't that bad. Hain managed costs pretty well, and it delivered a 30% jump in earnings despite an increase in commodity costs that led to a 200-basis-point drop in the gross margin. Revenue was up 18% from last year to $535 million, slightly below the consensus estimate, while the outlook was also more or less on par with expectations.
Now, Hain Celestial has been making numerous moves to make the most of the organic food opportunity. The company has undertaken a spate of acquisitions over the past few years, stamping its presence across markets ranging from North America to Europe and Asia. The latest of these acquisitions is that of basmati rice company Tilda, which Hain has acquired for $357 million. This acquisition is expected to boost Hain's bottom line by $0.06 to $0.10 per share in the second half of this year.
From a long-term perspective, this acquisition is really smart. Tilda has a portfolio of more than 60 dry rice and ready-to-heat products that it sells across 40 countries. Tilda's products are sold across the U.K., the Middle East, North Africa, Europe, North America, India, and other locations, further diversifying Hain's presence.
Hain management claims to have strong interest from retailers in the U.S. for basmati rice. However, the major benefits of this acquisition should be seen in the Asian market, where more than 90% of the world's rice production is consumed, according to the International Rice Research Institute.
Spreading its wings
Hain has been aggressively promoting its product portfolio. Its snack products are seeing good display activity at major grocery stores such as Whole Foods Market. Hain is also promoting its products through in-store weekly fliers at Kroger, Publix, Wal-Mart, Costco, and Target. In the U.K., Hain is pushing its products through Tesco, where its New Covent Garden Soup is being sold through 19,000 distribution points.
Also, to improve the efficiency of its European operations, Hain has made some key investments. It invested in a new non-dairy facility in Germany to improve capacity, which should help it reach a wider market in Europe through its Dream brand. Last year, Hain invested $70 million to improve infrastructure and distribution, and it is going to continue in the same vein this year as well.
Focus on key areas
In addition, Hain is also focusing on productivity savings to improve its earnings. In the previous quarter, Hain's productivity savings were $7 million, driven by plant efficiencies and savings in SG&A costs. The company has increased its internal production for certain products and it will continue to do this going forward to make its operations more efficient. Also, Hain is looking to introduce more than 100 new products at the Expo West show in March, which further increases its chances of tapping the organic food market successfully.
Further aiding Hain's chances of making the most of the organic food market is its solid distribution platform. As mentioned earlier, the company's products are sold through many grocers and retailers.
For instance, Whole Foods Market is looking to accelerate its store development program going forward. Whole Foods already has close to 400 stores in the U.S., Canada, and the U.K., and going forward, the company is targeting smaller, underserved markets. For instance, In the U.S., Whole Foods targets eventually opening 1,200 stores by expanding into markets where customers don't have easy access to its organic food offerings.
Something to watch
However, Hain Celestial could face stiff competition from bigger food companies such as General Mills that are moving into the organic food market. To woo customers, General Mills has decided that it won't be using genetically modified ingredients in Cheerios -- the well-known breakfast cereal. General Mills is also going to aggressively market its Yoplait Greek-style yogurt to increase market share. Hence, there is no dearth of competitors in this market and it makes sense for Hain investors to keep a close eye on rivals' moves.
The bottom line
However, from an investment point of view, Hain Celestial could prove to be a better pick than peers in the organic food space. Its trailing P/E is 31 while its forward P/E of 24 indicates that earnings growth can be expected going forward. With earnings expected to grow at an annual rate of 15% over the next five years, double the pace of General Mills, it is a fast-growing option for investors who are looking to make money in organic food.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Costco Wholesale, Hain Celestial, and Whole Foods Market. 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.