Saturday, March 2, 2019

A Current AIM Small Cap Equity Holding: Central Garden & Pet Company (CENTA, $27.63): “Cat Gotcha Tongue?” By: Gino Piscopo, AIM Student at Marquette University

Central Garden & Pet Company (CENTA, $27.63): “Cat Gotcha Tongue?”
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.


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