Monday, October 8, 2018

A current AIM Program Small Cap Equity Holding: Central Garden and Pet Company (CENTA) by: Tommy Borin. "Barking for Growth"


Central Garden and Pet Company (CENTA, $33.14): “Barking for Growth”
By: Tommy Borin, AIM Student at Marquette University


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary:

Central Garden and Pet Company (NASDAQ:CENTA) produces and markets products for the lawn, garden, and pets markets. They operate through two segments: pet and garden. The pet segment consists of various pet food brands and the garden segment consists various lawn and garden products

• CENTA has a strong M&A pipeline that continues to give the company strong growth prospects  

• Margins may feel some pressure as CENTA looks to grow  

• Beat 3Q18 sales estimates, slightly missed EPS

• The YTD stock price change for CENTA has been (12.12%)

Key points: 

Over the past few years there has been a dramatic shift in perception of pets. The humanization of dogs and cats has led to strong growth in the overall pet market. CENTA has worked hard to capitalize on this opportunity, acquiring General Pet Supply earlier this year. Their growth in this segment remained strong, posting 6.6% organic growth in ecommerce and mass in 3Q18. This stronger than expected performance in the pet segment was a main contributor to the topline estimate beat. However, EPS came in slightly below consensus at $0.79, missing street expectations of $0.80. The EPS miss was due to higher sales in the company’s lower margin distribution business.

The company has recently raised capital through both debt and equity offerings, totaling roughly $485 million. This cash provides the company with flexibility to acquire smaller companies moving forward. Having ample available cash on hand is a catalyst for CENTA due to their historic success with M&A’s. 

Management adjusted margin guidance down for the remainder of the year. As the distribution sales continue to grow, margins will continue to shrink. However, if sales mix shifts towards CENTA’s higher margin segments then we will see some recovery in the near term.

What has the stock done lately?

Due to the 3Q18 earnings miss the stock has been suffering recently, falling nearly 19% in the last three months. Unfortunately, this company has significantly underperformed the benchmark Russell 2000 index, which was up 3.13% in the last three months.

Past Year Performance: 

CENTA has decreased 10.89% over the past 52 weeks.  Since the AIM fund purchased the stock it has moved down 3.48%. The stock saw significant price increases over the summer months but fell 10% over five days due to lower margin guidance and an earnings miss. The stock has stayed depressed since its recent drop, falling to $33.14. This is a decline of 18% in the last three months. I believe the stock is still a strong hold due to CENTA’s excellent position in the pet’s segment, which comprises 61% of their sales.


Source: FactSet

My Takeaway:

Due to CENTA’s strong presence in the pet category and ample cash supply, I believe we will be seeing a lot of upside to the stock in the coming months. The company is working on shifting to higher margin product lines which will help alleviate the pressure from the distribution business. I believe that CENTA is still a strong hold for the AIM Fund.