NEW YORK (TheStreet) -- Last week Bank of America Merrill Lynch added Hain Celestial (HAIN - Get Report) to its US1 list of best ideas. The stock jumped higher on the news. Shares, at $68, are up 16.6% for the year to date.
Merrill thinks the company will face easier comparisons in the back half of the year, which would make Hain's results look better and drive the stock higher. But I'm not so sure. The natural and organic retailer and distributor sector has taken a beating. Since Hain supplies many retailers in the organic sector, it cannot avoid the problems in the industry.
Stocks like Sprouts Farmer's Market (SFM), Fresh Market (TFM) and Whole Foods (WFM) are down between 17% and 21% year to date. Last quarter, for example, Sprout's reported a disappointing same-store sales figure of 0.1%. Whole Foods has been struggling for a while. The company announced it would launch a smaller format store with lower prices to attract a demographic that doesn't shop its stores.
Merrill argues there are over 100,000 retail distribution points offering natural and organic products and the number of points continues to grow. More locations selling Hain's products should help the company to continue its growth.
The organic food sector is estimated to grow (on an annualized basis) about 10% a year from 2000 to 2017. Within two years, the sector is expected to sell over $60 billion worth of goods. That compares with the packaged foods sector, which is only expected to grow 1% at best.
Merrill thinks the retailers are experiencing more competition, which has knocked their stocks down, but it doesn't make a difference for Hain, since the company doesn't care who sells their products. But I think it does.
Revenue growth at Hain is expected to slow dramatically. Right now, analysts expect the company to produce $2.7 billion in revenue, up 25% year over year. But next year revenue growth is expected to slow to just 10%. Gross margins have flattened out too. This year, margins are expected to be down 2% and flat next year.
To me, this spells trouble in the organic sector: Retailers struggling to drive same-store sales and Hain slowing down.
Maybe the organic and natural foods sector isn't as large as everyone thinks? Maybe the sector has hit the ceiling? Who says the natural foods business has to grow forever? Even though Hain beat estimates for the last three years, maybe this year the company will just post in-line results?
I would be careful putting new money to work in the natural foods sector. It may be unhealthy.