INVESTMENT THESIS
Central Garden & Pet Co. (NGS: CENT) is HOLD. The company has been gaining market share through acquisitions and has signaled that additional M&A is part of its near-term strategy. CENT has also beaten analyst expectations in recent quarters and investors have taken note. The rally has lifted CENT shares to industry-average valuation levels, which we think are reasonable for a small-cap stock during the pandemic.
We caution, however, that the company has relatively limited e-commerce capabilities and is also facing pressure from commodity price inflation and supply-chain challenges. Moreover, management does not believe that it will be able to offset these headwinds solely with increased pricing.
RECENT DEVELOPMENTS
Central Garden & Pet recently released fiscal 4Q20 results that topped expectations. GAAP diluted EPS rose to $0.25 from $0.04. Operating income of $25 million rose 132% and the operating margin rose 170 basis points to 3.7%.
For the full year, CENT reported revenue of $2.7 billion. Organic sales increased 10.7%. EPS rose 37% to $2.20.Operating income of $198 million rose 30% and the operating margin improved 90 basis points to 7.3%. Full-year cash flow from operations increased 29% to $264 million.
Central Garden & Pet has pursued acquisitions to gain market share. In 2Q19, it acquired the remaining minority interest in Arden Companies, a manufacturer and marketer of outdoor cushions and pillows. In 3Q19, CENT purchased C&S Products, a provider of wild bird suet. Other acquisitions include Bell Nurseries and General Pet. Management has signaled that additional M&A is part of its near-term strategy.
It plans to increase capital spending and promotions, and looks for FY21 EPS of at least $1.90.
EARNINGS & GROWTH ANALYSIS
Based on the recent strong results, management guidance, and anticipated weak second half of FY21, we are maintaining our FY21 EPS estimate of $2.00. Our estimate is in line with management’s guidance (FY21 EPS of at least $1.90) and implies a 9% decrease from FY20, which benefited from favorable weather and stay-at-home trends during the pandemic.
FINANCIAL STRENGTH & DIVIDEND
After the end of the quarter, the company issued $500 million of 4.125% senior notes due October 2030, which will be used to redeem $400 million of 6.125% senior notes due 2023.
MANAGEMENT & RISKS
Prior to joining CENT, Mr. Cofer was EVP at Mondelez International. Nicholas Lahanas joined CENT in 2006 and has held various positions in finance. He became the company’s CFO in May 2017 and previously worked at private equity and investment banking firms.
CENT investors face customer concentration risks, as the company’s five largest customers account for approximately 49% sales. They also face risks related to COVID-19, changing retail trends, intense competition, unfavorable weather, pricing of seeds and grains, and the possibility of disappointing results at acquired companies.
COMPANY DESCRIPTION
It consists of two divisions, Pet and Garden. Founded in 1955, the company has about 6,000 employees.
VALUATION
Since the pandemic lows in March, the pattern has turned bullish, though we see resistance at $43. We may look to move the shares back to the BUY list if they fall toward technical support at $33.
On November 25, HOLD-rated CENT closed at $40.25, down $1.65.
Source: Argus
