Bernstein Not Confident In Accuracy Of Hain's Description Of Accounting Issues, Suspends Coverage

Bernstein’s Alexia Howard believes that the market currently assigns very limited potential for M&A for Hain Celestial Group Inc HAIN, with only a 5 percent probability.

Howard suspended coverage of the company, since it was at present unclear whether Hain Celestial’s description of its accounting issues was accurate.

Possible Scenarios

“While we can (and do) evaluate bearish scenarios related to revenues from US distributors, we cannot at present rely on the press release's statement that this is the full scope of the accounting issues while the internal investigation is ongoing,” the analyst explained.

With this in mind, Howard considered four scenarios for the company.

1. The accounting issue is completely timing-related and while Hain Celestial might miss its guidance for 2016, the MSD revenue would continue to grow going forward.
2. “The accounting issue is purely timing-related, but the company is either broken up or sold outright.”
3. The accounting issue is a major one and historical revenues would need to be rebased or inventories would need a meaningful write-down, with the company missing its guidance for 2016 and revenues growing in the low to mid single digits going forward.
4. The accounting issue is a major one and Hain Celestial is broken up or “bought as is.”

“Our analysis suggests that a probability weighted value of Hain using the above methodology would be ~$46/share,” Howard stated, while noting that the share price was currently at $37 per share.

M&A Unlikely

With the market assigning only a 5 percent probability to the scenarios suggesting M&A, the analyst believes that there is a 70 percent probability that the accounting issue is a major one, which would mean that the risk-reward is “asymmetric to the upside.”

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