Wednesday, December 19, 2018

A Current AIM Program Small Cap Equity Holding: Central Garden & Pet Company Class A (CENTA) by: Louisa Steinhafel. “Ruff Year in Terms of Price, but Core Business Still Going Strong”

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.


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