REF: Hambrecht & Quist (5/7/99)
Company: Central Garden & Pet Co.
Price: 13.75
Recommendation: Buy
Notes: a, b, f
Date: 5/7/99
Q2 In Line Driven By Strong Start to Lawn & Garden Season
CENT reported Q4 revenues and EPS of $447 million and $0.51 vs. our estimates of $411 million and $0.51 as revenues were driven by strong internal growth (+15%) in the lawn and garden business. The upside on the top line was offset by higher operating expenses which may impact Q3 EPS. Management indicated a long term agreement (if any) with Scott's may take 4-5 more months which may provide for a one year extension. We are leaving our FY99 EPS at $1.55 and maintain our BUY on valuation and long term growth prospects.
__________1998 A___1999 E___2000 E
Q1 EPS____$(0.02)__$(0.01)____$--
Q2 EPS_____0.42_____0.51_____--
Q3 EPS_____0.59_____0.72_____--
Q4 EPS_____0.22_____0.35_____--
FY EPS_____1.35_____1.55_____1.80
FY REVS (M)_1,295___1,535____1,639
CY EPS_____1.25_____1.56_____--
CY P/E______11________9______--
FY Ends: Sep
Current Price: $13.75
52-Week Range: $11-34
Market Cap(M): $450
Shares Out(M): 32.8
Book Value: $10.42
Net Cash/Share: $0.10
3-Year EPS Growth: 20%
CY98 P/E-to-Growth
CENT reports Q2 EPS in line with our estimates: Central Garden & Pet reported Q2 revenues and EPS of $447 million and $0.51 vs. our estimates of $411 million and $0.51. Revenues were significantly better than expected due to strong internal growth (+15%) and strong contribution from Pennington in the lawn and garden business. Moreover, management indicated that Branded Products - which represented 29% of sales - increased 15%+ in Q2. The upside on the top line was offset by higher operating expenses. As a result, EPS of $0.51 was in line with our estimate and $0.01 better than Street consensus.
Higher SG&A reflects strong season and brand building: CENT's operating expenses increased by ~$20 million representing 16.2% of sales - up from 14.8% a year ago. Management indicated that $7 million of increase is due to incremental costs while the remainder was driven by higher than expected sales. Out of the $7 million, approximately $2.7 million was driven by higher selling and warehouse expenses associated with the robust lawn & garden season. Another $1.8 million was invested on brand building efforts including marketing and new product development. Lastly, an incremental $2.5 million was spent on outsourcing deliveries to third party common carriers to meet increasingly strict just-in-time- shipping deadlines from key retailers. Importantly, we believe selling and warehouse costs will normalize in Q3, however, the remaining expenses are likely to continue.
Q3 off to a good start: Management indicated that strength in the lawn & garden business continued through April. However, the key month will be May in determining if the garden season came early or will it be longer, and stronger than normal. With higher expense levels heading into Q3, a longer garden season is key for CENT to deliver strong results.
No significant update on Scott's or acquisition program: Management did not given any new significant details on its ongoing negotiations with Scott's related to the Solaris business. Scott's has indicated to CENT that it will likely take 4-5 more months to work out a long term agreement but that a one year extension could be done quickly. Additionally, CENT continues to actively look at acquisition candidates there was no update on timing or size of the opportunities.
Flea and Tick program in the dog house: For the last couple of years, Central developed a systemic pill for flea and ticks to be sold over-the-counter. Since, Central controls the manufacturing and distribution, this branded product was expected to yield high margins and possibly add $2 million to operating income in FY99 ($0.03 per share) On the call, management indicated that the FDA is currently auditing the test lab Central used which will delay the project into FY00.
Maintain forward estimates and BUY recommendation: We are maintaining our full year target of $1.55 and introducing a FY00 estimate of $1.80. We maintain our BUY based on valuation and long term growth prospects but remain somewhat cautious due to the uncertainty surrounding the Scott's agreement.
Note Legend:
(a) Hambrecht & Quist LLC maintains a market in these stocks.
(b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or has privately placed securities of these companies within the last three years.
(f) Options are available on these issues.
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Regards - Dale |
