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Tickers in this Article: STNR, CCL, RCL, HOT, M, JWN
The S&P Small Cap 600 stock index is down 22.5% since September 8, 2008. Why is this significant? It was on this day I recommended that investors stay the course with spa operator Steiner Leisure (Nasdaq:STNR), noting "I believe the opportunities are limitless for the Miami-based company ... Once a healthy economy returns, so too will Steiner's stock price." It has. Although not nearly as much as I was anticipating, up just 3.4%. Relative to the benchmark it's fantastic, but I expect much more from this wonderfully run company. For current investors, I suggest you continue to stay the course.

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Making Things Happen
The economy has made it difficult to maintain growth, forcing Steiner to manufacture some. On November 2, Steiner acquired the Bliss spa business from Starwood Hotels (NYSE:HOT) for $100 million. The acquisition will be slightly accretive to 2010 earnings. The exciting part of this deal isn't the spa operations, but rather the Bliss product line, which is currently sold online and through department stores like Bloomingdale's, Macy's (NYSE:M) and Nordstrom (NYSE:JWN). Steiner's global network of spas on land, sea and in the air will increase the distribution reach of the skin care line beyond its current availability. Having stayed at a couple of W Hotels in the past, and bringing home some of the Bliss skin care products in my suitcase, I believe this could become Steiner's leading brand and its next growth engine.

Great Cash Flow
This is where great companies make their mark, using positive cash flow to take advantage of unique opportunities - Starwood unloaded a strong brand to focus on hotel operations - as they present themselves. Paying for the Bliss acquisition will be a piece of cake given its financial strength. With $47.9 million in cash, it'll borrow a maximum of $70 million to close the deal. With trailing twelve-month free cash flow of $61 million, it should be able to pay for the purchase in less than a year. By that time, the economy should be a little stronger and discretionary spending a little higher. This can only work in Steiner's favor. (Learn more in Strategies For Quarterly Earnings Season.)

Future Earnings
Analysts estimate 2009 earnings per share of $2.26, and $2.46 in 2010. In terms of net income, that's $32.95 million and $35.87 million, respectively. Historically, Steiner hasn't seen earnings this low since 2004. However, its current price-to-earnings ratio is 13.7, below its five-year average of 15. In addition, its price-to-sales ratio is 1.1, also below its five-year average of 1.4. It isn't cheap right now, but the future is brighter than analysts are projecting. For instance, analysts see $2.26 in EPS this year according to Yahoo! Finance. As of the third quarter, it was at $1.82. That would mean analysts believe it will do 44 cents in the final quarter. That's a decline of 44.3% year-over-year.

In the first three quarters of 2009, Steiner has averaged earnings-per-share declines of 15.7%. A more realistic decline is 30%, in my opinion. That would mean 55-cent earnings per share in the fourth quarter and $2.37 a share for the entire year. For 2010, I'll use 8.8% growth in earnings per share (the same as analysts) for $2.58. At current prices, that's a forward P/E of 14.9, which is right on its five-year average. That's reasonable, if not cheap. (If you thought investing and fun don't go together, think again. Find out more here: Leisure Funds: Where Luxury And Fun Come To Make Money.)

Bottom Line
Despite a cruise industry that's reeling with declining passenger travel, Steiner's two biggest customers, Royal Caribbean (NYSE:RCL) and Carnival (NYSE:CCL), are still making money. That's where Steiner comes in. If the cruise companies want to continue to make money, their ships need onboard activities. What could be better than an afternoon at the spa? Until traffic increases, Steiner will continue building the products side of the business. Long-term, it's clear sailing.

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