REF: TheStreet.com (1/15/99)
Despite its stock's recent performance, Central Garden & Pet (CENT:Nasdaq) is by no means a daisy-pusher.
The distributor of lawn and garden and pet supplies has seen its share price slide as low as 12 1/4 recently amid uncertainty about the future of its relationship with a key supplier and disappointing fiscal fourth-quarter earnings.
But if in spring a young person's thoughts turn to love, once he passes 50, he turns to puttering around in the garden out back. With demographic trends like that on its side, solid internal growth and a string of acquisitions, Central's stock looks like a bargain as the planting season approaches, analysts and investors say.
"It's very cheap," says Chip Paquelet, a portfolio manager with Menomonee Falls, Wisc.-based Strong Capital Management, which owned 1.2 million shares, or about 4% of the company, on Sept. 30, according to data-tracker Technimetrics. Paquelet says he has since increased his holdings. "They're on track to deliver more than what Wall Street expects in 1999."
Central closed Friday at 14 3/4, up 1/4.
Central's trailing price-to-earnings ratio is about 13, and it trades at a P/E of just under 10 based on its fiscal 1999 First Call consensus of $1.50 a share. Chairman and CEO William Brown says he's comfortable with something "somewhat north of that." Its price-to-sales ratio is 0.35, and its price-to-book ratio is 0.8.
"They are planning on having a very strong lawn and garden season in 1999," says Kenneth Salmon, an analyst with Cleary Gull Reiland & McDevitt in Milwaukee, who rates the company accumulate, the firm's second-highest rating. His firm hasn't performed underwriting for Central. "The number of products they're distributing is way up, and the number of stores is way up."
Central's strategy is to bridge the gap between small lawn, garden and pet supply producers and big retailers like Wal-Mart (WMT:NYSE). "Those national companies don't want to sit down with 300- to 400-product companies every season," says Shawn Milne, an analyst with Hambrecht & Quist, which rates the stock a buy. H&Q has performed underwriting for the company.
So Central does it for them, offering retailers some 45,000 different products from about 1,000 manufacturers. It also has its own stable of branded products including Nylabone and Zodiac. Most products retail for $20 or less. Its sales and marketing reps help retailers make the purchases to suit local growing conditions -- stocking more petunias or pumpkins, depending on whether the store is in Arkansas or Oregon -- and restock shelves once a week.
In the lawn and garden distribution business, which accounts for 60% of Central's 1998 sales, "they're the 800-pound gorilla," says Cleary's Salmon.
The pet supplies unit, which accounted for about 16% of 1998 sales, hasn't seen such rosy times. Though demand for pet goodies is rising -- even Gucci (GUC:NYSE) is making dog collars these days -- pet retailers have consolidated as chains like PETCO (PETC:Nasdaq) and PETsMART (PETM:Nasdaq) snap up smaller operators, shrinking Central's market. In response, Central closed 11 distribution and sales centers, resulting in a $7 million charge in the fourth quarter ended Sept. 26. Eventually, that will save as much as $4 million annually.
"In 1999 they need to show they can get growth back in the pet supply distribution business and show no further disruption from consolidation," says Salmon. H&Q's Milne says there's a huge opportunity for Central to forge the same kind of relationship with retail biggies as it has on the lawn and garden side.
Brown, the CEO, says Central aims to grow 8% to 10% internally, another 7% to 8% through smaller acquisitions and, if the deal's right, another 7% to 8% via a larger purchase along the lines of last year's $151 million purchase of Pennington Seed. In the past year or so, it's also bought Kaytee Products, pet supply and book company TFH Publications and Norcal Pottery Products.
"They have a good, disciplined acquisition strategy," says Greg Roeder, an analyst with C.L. King & Associates in Albany, N.Y., who rates the stock a strong buy. His firm has performed underwriting services for the company. "They don't overpay."
Some investors are more worried about a business that Central didn't buy: Monsanto's (MTC:NYSE) Solaris lawn and garden business, whose products accounted for around 30% of Central's sales. Monsanto is instead selling it to Scotts (SMG:NYSE), so Central has to negotiate a new agreement with the business' new owner. The current agreement runs through Sept. 30. CEO Brown says the two companies will talk over the next couple of months.
"The last four years have proven that this model works well for all parties involved," says Cleary's Salmon. "I don't think that with all the things on Scotts' plate they want to shake up things too much, particularly with large customers that like Central Garden."
Besides the Solaris uncertainty, investors were spooked by an unpleasant earnings surprise. In December, the company said net income in the fiscal fourth quarter, excluding the charge, was 22 cents a share, less than the 28 cents expected by a five-analyst First Call consensus. "Against our internal budget, we were 10% to 15% short on sales," says Brown. He blamed the shortfall on the weather: Excessive heat in some areas of the country and flooding in others reduced demand for grass seed and pesticides.
Analysts say the post-earnings stock drop has more to do with the surprise than fundamentals. "The big picture still remains the same," says H&Q's Milne.
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Thanks go to MarginJohn who posted this info on the Yahoo! thread 1/17/99 (post #808), Ref/link: messages.yahoo.com;
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Regards - Dale |
