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Making A Play On Playtex (PYX)
Playtex Products (PYX) has been undergoing a re-structuring since 2004. The company was filled with non-core, low margin products and its balance sheet was overleveraged forcing returns down into single digits.
Playtex operates in a highly competitive consumer and personal products sector where it bangs heads with giants such as Kimberly Clark (KMB), Procter & Gamble (PG) and Avon Products (AVP).
Competing with these giants has had an adverse affect on operating margins. Over the past couple of years PYX has launched an aggressive campaign to rid itself of those non-core low margin businesses and improve its overall cost structure.
Additional gains will be made at a somewhat slower pace as promotional activity from its competitors raises problems for PYX.
Some relief will come from easing of raw materials prices, which had hampered PYX in recent quarters. Further gains will be generated by PYX's effort to introduce new products.
PYX operates in three main business lines: Feminine Care, Skin Care and Infant Care. Feminine Care accounts for about 34% of sales but remains it slowest grower. In fact, year over year sales have fallen slightly. Introduction of new products in the 4th quarter of 2006 is expected to help faltering sales. Sales, near term, are expected to grow nominally at about 3%.
Skin Care is the fastest growing segment with mid teen growth rate in sales. Introduction of new products is the main driver of sales but improved business processes had a positive impact. New advertising and promotional efforts have also positively impacted sales.
Infant Care remains the most stable business segment. Sales are expected to remain in the mid-single digits. Sales of established products remain in line while new product launches are helping to maintain the steady sales growth rate.
All segments have been negatively impacted by higher raw material costs, however the increases have moderated and year over year comparisons should be favorable to PYX. Margins will be help as new products positively impact its sales mix, and improved cost structures and selected outsourcing are also helping margins.
Net profits will also be improved as PYX has been aggressively paying down debt. Since the end of 2005, PYX has reduced it outstanding debt by 16% while removing some high coupon interest payments. No additional principal repayments are now due until 2011 which will free up some additional cash flow for other corporate activities.
Having suffered through a majority of its restructuring phase, PYX is now well-positioned to begin new growth. Margins are returning to previous levels, the balance sheet is being de-leveraged, which will improve earnings growth and cash flow. Additionally, PYX has no significant underfunded pension liabilities.
Looking forward, PYX is expected to report full year earnings of $0.48 a share for 2006. Estimates for 2007 and 2008 are $0.60 and $0.76 respectively, an average growth rate of 26%. Operating margins will be lower than Procter and Gamble's but higher than those of Kimberly Clark and Avon. As well, PYX will be more inexpensively valued than all three on a price/sales basis.
After the re-structuring, PYX will be generating an increasing amount of free cash flow that can be used to enhance shareholder value. Through the third quarter, PYX has repurchased 1 million shares at a cost of $11.6 million. Additional purchases will probably be made.
Investors, after much patience, will see higher growth and increasing cash flows during a time when overall corporate earnings growth is expected to fall to mid-single digits levels. The five-year outlook for PYX's earnings growth rate is 11%, which in my mind makes it a good bet for the coming years.
Playtex operates in a highly competitive consumer and personal products sector where it bangs heads with giants such as Kimberly Clark (KMB), Procter & Gamble (PG) and Avon Products (AVP).
Competing with these giants has had an adverse affect on operating margins. Over the past couple of years PYX has launched an aggressive campaign to rid itself of those non-core low margin businesses and improve its overall cost structure.
Additional gains will be made at a somewhat slower pace as promotional activity from its competitors raises problems for PYX.
Some relief will come from easing of raw materials prices, which had hampered PYX in recent quarters. Further gains will be generated by PYX's effort to introduce new products.
PYX operates in three main business lines: Feminine Care, Skin Care and Infant Care. Feminine Care accounts for about 34% of sales but remains it slowest grower. In fact, year over year sales have fallen slightly. Introduction of new products in the 4th quarter of 2006 is expected to help faltering sales. Sales, near term, are expected to grow nominally at about 3%.
Skin Care is the fastest growing segment with mid teen growth rate in sales. Introduction of new products is the main driver of sales but improved business processes had a positive impact. New advertising and promotional efforts have also positively impacted sales.
All segments have been negatively impacted by higher raw material costs, however the increases have moderated and year over year comparisons should be favorable to PYX. Margins will be help as new products positively impact its sales mix, and improved cost structures and selected outsourcing are also helping margins.
Net profits will also be improved as PYX has been aggressively paying down debt. Since the end of 2005, PYX has reduced it outstanding debt by 16% while removing some high coupon interest payments. No additional principal repayments are now due until 2011 which will free up some additional cash flow for other corporate activities.
Having suffered through a majority of its restructuring phase, PYX is now well-positioned to begin new growth. Margins are returning to previous levels, the balance sheet is being de-leveraged, which will improve earnings growth and cash flow. Additionally, PYX has no significant underfunded pension liabilities.
Looking forward, PYX is expected to report full year earnings of $0.48 a share for 2006. Estimates for 2007 and 2008 are $0.60 and $0.76 respectively, an average growth rate of 26%. Operating margins will be lower than Procter and Gamble's but higher than those of Kimberly Clark and Avon. As well, PYX will be more inexpensively valued than all three on a price/sales basis.
After the re-structuring, PYX will be generating an increasing amount of free cash flow that can be used to enhance shareholder value. Through the third quarter, PYX has repurchased 1 million shares at a cost of $11.6 million. Additional purchases will probably be made.
Investors, after much patience, will see higher growth and increasing cash flows during a time when overall corporate earnings growth is expected to fall to mid-single digits levels. The five-year outlook for PYX's earnings growth rate is 11%, which in my mind makes it a good bet for the coming years.
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