Central
Garden & Pet Company Class A (CENTA, $30.25): “Ruff
Year in Terms of Price, but Core Business Still Going Strong”
By:
Louisa Steinhafel, 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 & Pet Company (NASDAQ: CENTA) engages in the
innovation, production, and distribution of branded private label products for
the pet supplies and lawn and garden markets. They operate through two main
business segments: Pet (61% of FY18 Sales) and Garden (39%). The company was
founded in 1980 and is headquartered in Walnut Creek, CA.
• CENTA released FY2018
earnings in November with net sales and diluted EPS increasing 7.8% and 52.6%
YoY respectively.
• Despite these gains,
CENTA faced challenges with their Garden business due to unfavorable weather
and their Pet segment due to decreased fly, flea, and tick control sales.
• FY2018 was another successful
year for CENTA regarding acquisitions. They acquired Bell Nursery and General
Pet Supply, allowing them to expand into live plants and increase their
distribution capabilities.
• Moving forward,
management has indicated they plan to have some historically large margin
accretive acquisitions in FY2019. This is supported by their successful track
record integrating their acquisitions and strong balance sheet.
Key
points:
Central Garden and Pet Company released FY2018
Financial Results on November 27, 2018. CENTA saw net sales increase 7.8% from
$2,054.5 million in FY2017 to $2,215.4 million in FY2018. Diluted EPS increased
52.6% from $1.52 in FY2017 to $2.32 in FY2018. Despite these gains, the year
certainly was not without its challenges. Factors such as unfavorable weather
and decreased sales for fly, flea, and tick control products effected CENTA’s
Garden business and Pet segment.
With a history of
acquiring over 45 companies since 1990, CENTA has not shown signs of steering
away from their acquisitive nature, and it certainly was a topic of
conversation in their Q4 earnings call. FY2018 was another successful year in
terms of acquisitions with two new opportunities for the company: Bell Nursery
and General Pet Supply. Through their acquisition of Bell Nursery, the largest
commercial grower of live plants and flowers in the mid-Atlantic region, CENTA
has been able to expand into the live plant area. In doing so, they are also
able to cross-sell their own brands and existing garden products. Additionally,
through acquiring General Pet Supply, a leading Midwest region supplier of pet
supplies and food, CENTA is able to greatly increase their distribution
capabilities and create a stronger presence within the Midwest. Despite the
opportunities presented by their recent acquisitions, it did lead to some
margin dilution over FY2018. Gross margin decreased by 31 bps while operating
margin decreased by 15 bps.
CENTA’s CEO, George
Roeth, indicated in November that they are looking for margin accretive
acquisition candidates, with potential for transactions to be as large as $500
million. The company has had two capital raises this past year: $300 million in
senior notes in December and $185 million equity offering in August of 2018. The
company has a successful history integrating their acquisitions and a strong
balance sheet to support their strategic initiatives moving forward.
What
has the stock done lately?
Over the past 12 weeks,
CENTA has seen a change of -14.4% trading at $35.34 on September 24, 2018 and $30.25
on December 7. However, the company released Q4 earnings in November and upon
doing so, the stock increased 15.5% from $27.14 on November 28th to
$31.34 on December 3rd.
Past
Year Performance:
CENTA has a 52 Week H/L of $41.97 -
$27.14. They were trading as high as $40.39 in August of 2018 and as low as
$27.85 at the end of November, representing a change of -31.0%. As stated
above, the company has since seen a bump in price. Overall, CENTA is down 19.7%
YoY as they were trading at $37.69 on December 12, 2017 and are now currently
priced at $30.25.
Source:
FactSet
My
Takeaway:
In terms of stock price, CENTA
has had some challenges since July of 2018. However, they released positive FY2018
results and are showing signs of continued growth and improvement. The company
has been working on building out their digital capabilities to address the
changing retail space. CENTA has four new teams comprised of expert employees
that are dedicated to driving demand in the digital space. They have also
increased the size of their consumer insights team in order to better
understand consumers and their changing preferences. In terms of their large
acquisition outlook for FY2019, CENTA’s CFO, Nicholas Lahanas, stated in their
most recent earnings call that they only look towards acquisitions when they
feel they have both a strong operating rhythm and core business that is growing
organically and consistently.
1
Month Stock Chart from 11/12 to 12/10
Source:
FactSet
