Growth Ahead for Central Garden & Pet

Central Garden & Pet (NASDAQ:CENT) is not your garden variety consumer defensive stock. In recent years, the company has demonstrated a unique ability to go on offense by capitalizing on not one but two growing industries.

With exposure to the surging pet products industry as well as the healthy gardening market, Central Pet & Garden has blossomed into a formidable two-headed growth monster. Sales and profit growth have picked up over the last few years and appear destined to remain strong.

This far in fiscal 2021, Central Garden & Pet has delivered 47% EPS growth and consistently exceeded analyst expectations. Despite this and an upbeat outlook for the remainder of the year, the mid-cap stock is down 23% from its March 2021 peak. Given Central Garden & Pet’s two-pronged growth prospects, it’s time to think about cultivating a position.

What Does Central Garden & Pet Do?

As the company name suggests, Central Garden & Pet is a leading manufacturer and distributor of about 70 lawn & garden and pet brands. The name could technically be reversed though since the pet side of the business accounts for roughly 60% of revenue.

Central Garden & Pet makes branded and private label products in addition to distributing third-party brands. Since the company isn’t a retailer, it doesn’t compete with the likes of PetSmart, PETCO, and Chewy. In fact, all are customers as are big box stores like Walmart, Home Depot, and Lowe’s. It also sells it products to a variety of nurseries, grocery stores, and veterinarians. Costco, Tractor Supply, Kroger, and even Amazon are some of its other key retail partners.

The pet business is focused on pet supplies and treats for dogs, cats, birds, fish, horses, and livestock. Kaytee, C&S, Aqueon, Nylabone, and four paws are among its leading pet supply brands. It doesn’t sell dog food, cat food, cat litter, nor does it provide any veterinary or grooming services, the other major parts of the pet market.

In the lawn & garden space, Central Garden & Pet sells in-house and third-party grass seeds, fertilizers, pesticides, decorative lighting, and other outdoor products. Pennington, a line of bird food, grass seed, and fertilizer, is its most popular brand.

What are Central Garden & Pet’s Growth Opportunities?

The garden and pet industries are both large and both have good long-term growth trends. First and foremost, innovation and new product launches will continue to be important growth catalysts in both divisions.

Central Garden & Pet is one of the few large players in the $30 billion lawn & garden consumables market that isn’t a big box home center or mass merchandiser. This industry has several growth drivers including increased residential spending on landscaping, increased global attention on sustainability, and an accelerating shift towards e-commerce. This is a very seasonal business, however, so it tends to do well in the warmer months and lag during the winter.

On the pet side the business, the growth trends include the humanization of pets and increased focus on pet heath & wellness both of which have accelerated during the pandemic. And since pet owners crave convenience like never before, e-commerce is playing a bigger role in the market. Like the garden business, the pet supplies market is fragmented so there are ample opportunities for consolidation.

A defining part of Central Garden & Pet’s growth strategy is M&A activity. Over the lasty 25 years it has acquired more than 50 pet and garden brands. Its ability to integrate new businesses has provided scale and improved operating efficiencies. Considering how fragmented both of its markets are, this will continue to be a part of the growth story and by itself makes the stock an attractive roll-up play.

Last year, Central Garden & Pet’s e-commerce sales rose 192% and 37% in the garden and pet segments, respectively. Online sales account for 20% of the pet business but just 3% of the garden business so the growth opportunity on the garden side is especially large.

All but 5% of Central Garden & Pet’s sales are generated in the United States. So, the runway for international expansion is also extensive.

Is Central Garden & Pet Stock a Buy?

The bottom is most likely in for Central Garden & Pet. Barring a sustained market downturn, we are likely to see the stock trend back into the $50’s from its recent low of around $43.

From a technical perspective, it has regained the key 50-day moving average and the 200-day line is not far away. Trading volume has picked up this week and the relative strength indicator (RSI) has made a strong move back into the 60’s.

With Central Garden & Pet investors are getting a company with accelerating growth metrics and a leading player in a pair of large, growing markets. More work is needed to reduce long-term debt, but overall, the financials are solid. Cash flow from operations is trending in the right direction and the company is sitting on about a half billion in cash for acquisitions, product expansion, and international growth opportunities.

On the concerns side of the ledger, Central Garden & Pet is presently grappling with rising commodity costs, supply chain challenges, and labor shortages. While management expects inflationary pressures to persist into 2022, the other challenges are probably more transitory.

The valuation looks attractive at 15x trailing earnings compared to 19x for the S&P 400. The landscaping season may be winding down, but Central Garden & Pet still has plenty of growth ahead.