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No. of Recommendations: 3

I'll be frank; I hate most of the food Hain Celestial sells. I've never been bit by the organic bug (maybe because it was killed by my pesticide laden food) and I always had trouble paying a premium for a product that in the best cases taste the same as “normal” food and at worst tastes terrible. That doesn't mean that the stock isn't a tasty little morsel though.

Hain is certainly riding a powerful (and profitable) wave in consumer's organic sentiments. Just ask shareholders of organic food peddler Whole Foods what charging a premium for what is normally a commodity can do to your shares. But Hain has a number of other things going for it as well. It sports a healthy balance sheet flush with $20 million in cash and a miniscule debt to equity ratio of .175. This is specifically impressive for a company that relies on acquisitions for the bulk of its growth.

In the highly fragmented market of organic and specialty food producers, growth by acquisitions makes a lot of sense. Management has identified a powerful model whereby they are able to acquire little known brands for say $18 million and grow them into $50 million dollar brands by leveraging their existing relationships with grocers. This has led to steady growth as brands like Westsoy, Terra Chips and Rice Dream have all been successful acquisitions for Hain.

The problem I see is what I deem Hain's terminal value. When I am considering an investment, I like to consider where I think the market cap will end up over the life of my investment given the current and projected strategies of management. I try to envision what the potential market is for the product of the company. For example, Hain is a $800 million dollar company today. Given management's current strategy, Hain will probably never grow into a big food conglomerate like ConAgra at about $10 billion. I figure Hain will only be able to reach a market cap of about $1.5-2 billion with perfect execution before growth slows and PE contracts. But why?

Hain has had reasonably pickings when it started acquiring small specialty food producers, but the competition is getting thicker. This was evident in Hain's attempt to by Burt's Bees. After aggressively bidding for the company, Hain had to remove itself from the running as the price outstripped management's fair value. Kudos to management for walking away and not overpaying, but they may not be so lucky in the future. Or similarly bad, they may not be able to profitably keep acquiring companies to fuel expansion.

Hain's business model may prove to be a winner in the short term, and management might have a few tricks of its sleeve long-term, but today I am still on the fence. At a more reasonable level I might be enticed to nibble, say at around a PE at around 30, but today's prices seem a little rich.

Please let me know what you all think.

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