Organic Growth

As Wal-Mart and its ilk go natural, true believers are grumbling. But investors are chowing down.

It’s the ultimate irony. For the past three decades, the organic food movement has extolled the virtues of pesticide-free produce, grass-fed beef, free-range chicken, and a host of other alternatives to the industrial food complex. Now that Americans have finally caught on and are actually buying organic food in numbers that nobody—not even Wal-Mart —can ignore, the very people who were preaching organic have gotten downright whiny lately.

“As organics become more mainstream, the standards are at risk,” says Ronnie Cummins, a national director for the Organic Consumer Organization. “Mass market and organics aren’t always compatible,” he adds.

But wasn’t going mainstream the whole point? When the modern organic-food movement began in earnest more than 30 years ago, didn’t the founders dream of healthier, sustainably grown fare gracing every American dinner table? Now, to hear some industry leaders, you’d think that only people who live near a farmer’s market or those who are willing to pay fat premiums at the health-food store are deserving of hormone-free milk.

To be fair, there’s certainly more at work here than a bad attitude. Unprecedented growth is causing real turmoil. Sales of organic food are estimated to have reached $15.7 billion in 2006, up from $13.8 billion in 2005, according to the Organic Trade Association (OTA). Even though organic accounts for less than 3% of overall food sales, that’s riotous growth in an otherwise glacial industry. And it’s bound to continue as giant retailers scramble to fill shelves with alternative products.

Double-digit growth rates mean there are simply not enough organic farms, organic feed, and organically raised animals in the United States to meet demand. The result is enormous pressure to increase supply, which, in some cases, is leading to questionable practices. Horizon and Aurora, two of the nation’s largest suppliers of organic milk, have come under fire for keeping thousands of cows on feedlots with very little or no access to pasture.

The huge demand for organics has been a boon for investors, though. The handful of publicly traded organic-related stocks have surged in the last year. Whole Foods, for instance, saw its stock climb to a high of $73 last summer. (The stock came back to earth last November when the company announced that new store expansion would slow significantly.)

One stock that still has plenty of room to move is Hain Celestial, the seller of natural and organic packaged-food brands such as Earth’s Best, Arrowhead Mills, Walnut Acres, and Celestial Seasonings teas. Many have been on the shelves for decades, giving Hain the luxury of longstanding and preferential relationships with organic growers and manufacturers. These relationships have helped the company keep supplies steady, even as Hain’s sales grew 19% last year and 14% the year before.

Hain Celestial stock was recently trading around 29, with a price/earnings ratio of 30. That’s not too far off the industry average P/E of 23. The big growth story for this stock, however, is Hain’s aggressive expansion into organic personal-care products, a tiny but superfast-growing corner of the market. Sales in the category are estimated to have jumped 24% in 2006, says the OTA. Just this past December, Hain announced its acquisition of Avalon Natural Products, maker of natural and organic skin- and hair-care goods, for $120 million. Analysts figure the deal will help boost earnings 18% to $1.18 per share for fiscal 2007, ending in June. Estimates for fiscal 2008 average $1.42 per share. That’s a 20% jump, and pretty appetizing any way you slice it.

Walecia Konrad is an award-winning journalist who has worked at several leading business publications, including Smart Money and Business Week. She specializes in investing and personal finance.

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