By:
Gino Piscopo, 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) produces and
distributes branded and private label products for the lawn, garden and pet
supplies markets in the United States.
• CENTA released quarterly
earnings of $0.03 per share compared to $0.19 per share a year ago.
• The stock is trading almost
30% lower than when it was pitched.
• Private acquisition
multiples are reaching all-time highs.
• Poor weather and
slowing pet industry have hurt their current product mix.
• Trading multiples are extremely
attractive.
Key
points:
Central Garden & Pet Co. heavily relies on
acquisitions for growth. With over 50 strategic acquisitions in the past 25
years, management is constantly scouring the market place for small local
business to roll-up into their existing product portfolio. Current multiples
for these acquisitions are at an all-time high which will lead to more
decretive acquisitions in the future. This leads into to the reason CENTA
missed earnings by $0.12 cents against consensus.
When CENTA was pitched,
many thought the pet industry could consistently grow at the rate it has been
since the great recession. According to the American Pet Products Association
the pet industry expenditures have grown at a CAGR of 5.4% since 2009, but in
2018 it only grew by 3.8%. This slowing growth should have been expected after
seeing expenditures grow at such a high tick. On top of this, poor weather hit the
garden business. CENTA’s peers Scotts Miracle-Gro (SMG) and Spectrum Brands
(SPB) have also missed earnings for the same reason.
Drivers for Central
Garden & Pet were the acquisitions of Bell Nursery, which is the largest
commercial grower of live plants and flowers, and General Pet Supply, a leading
Midwest region supplier of pet supplies and food. Management has not released the
terms of either deal, but it is expected that both are non-materially accretive.
As mentioned before CENTA
is reliant on bolt-on acquisitions to grow. Both, Bell Nursery and General Pet
Supply have cross-selling capabilities with their existing product portfolio.
This is important because with when dealing with customers like Walmart it is
vital to find ways to expand margins.
What
has the stock done lately?
After reporting earnings
on February 6th, the stock fell 22%. Consensus had EPS at $0.15 and
CENTA reported $0.03. This huge hit was attributed slowing pet expenditures and
poor weather which effected their garden business.
Past
Year Performance:
A year ago CENTA was trading at $36.24 and
was underperforming compared to the S&P. Nevertheless, the price was stable
in-between periods of earnings and then more recently CENTA dropping off and
became much more volatile.
Source:
FactSet
My
Takeaway:
Frequently when a company
misses earnings it is not a sign of future earnings misses but rather a fluke in
the quarter. Unfortunately, this insight could only be seen now after experiencing
the poor performance by CENTA. In my opinion Central Garden & Pet Company needs
to be a sell due to management being unable to recoup losses.
Source:
FactSet
