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.
