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Prestige In Name Only
Take a quick look at a few of the products Prestige Brands Holdings (NYSE: PBH) brings to the market and you will notice that, contrary to the initial image invoked by the company's name, they are some of the least glamorous consumer goods available today. But how will they make your portfolio look?
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The company's brand includes such practical household necessities as "Chore Boy" scrubbing pads, "Chloraseptic" oral painkillers, "Compound W" wart removers and last but certainly not least on the humility totem pole, "Denorex" medicated dandruff shampoos. Its products are sold in such glamorous venues as Dollar Tree (Nasdaq: DLTR) and CVS Caremark (NYSE: CVS) drug stores.
Stable Revenue Streams
But this humble product lineup has been able to produce impressively stable annual sales numbers over the past several years. In fact, in its recently completed fiscal year 2009 (ended March 31), PBH was able to put up a top line sales number of $312.7 million, down only 4% from its $326.6 million from its fiscal 2008. (For more, see Spotting Cash Cows)
I, for one, am impressed that PBH was able to put up nearly flat year-over-year sales numbers during these extremely difficult economic conditions in which it seems virtually every public company is suffering substantially. Even this industry's 800-pound gorilla, Procter and Gamble (NYSE: PG), saw its Q3 2009 (also ended March 31) total net sales fall 8% from its third quarter of 2008.
Enviable Free Cash Flow
When you dig past the surface-level earnings, the first thing that stands out for Prestige Brands is its strong and consistent free cash flow generation. In the three years from 2006 to 2008, the company averaged $56 million in annual free cash flow.
Even during the tough economic times of the past year, Prestige Brands actually managed to grow its free cash flow by 49% over the prior year, coming in at $66.2 million for fiscal 2009. With its reported 50 million shares outstanding, that works out to $1.32 worth of free cash flow per share. (For more, see Analyze Cash Flow The Easy Way)
This is a substantial improvement over the free cash flow average of $56 million from recent years past, and an increase of incoming cash is definitely something many investors value in a company during this period of ongoing credit shortage.
Far From a Prestigious Price
Yet, even with its consistent success, the market has steadily traded PBH shares downwards over the past few years. At market close on May 19, 2009, the stock was trading just above $6 after a rather steep sell-off, giving it a trailing free cash flow yield of 22%. At that price level, PBH shares could double in price before they could reasonably be considered fairly valued on a free cash flow basis!
Buyer Beware
The market may be primarily driven by fear right now, but we should be careful not to overlook the market's current discount on this stock's price -- there are a few valid risks to consider.
Most notably, the company's balance sheet reveals a substantial use of leverage, similar to its industry's competitors such as Procter and Gamble. But where a company like P&G has the advantage of size to mitigate some of the risks that come with leverage, Prestige Brands clearly does not, with its current market capitalization of only about $300 million.
If Prestige Brands fails to produce the cash flow it needs to service its substantial long-term debt load, the current $6 share price may very well prove to be about $6 too high. Add in the recent quarter's goodwill write-downs of $220 million, and there is enough uncertainty with Prestige to justify keeping it out of your portfolio for the time being.
The Final Word
That said, it would take truly devastating economic conditions to get consumers to stop buying products like dandruff shampoo, especially if they happen to be unemployed and looking for job interviews! So I expect PBH has a better chance than most companies of keeping its top line sales volume, and thus its bottom-line free cash flow levels, reasonably intact in the years to come. If that turns out to be the case, investors who buy at current prices may end up being able to look back on their PBH shares in the years to come as a source of prestigious returns for their portfolio. (For further reading, see Free Cash Flow: Free, But Not Always Easy)
IN PICTURES: 20 Tools For Building Up Your Portfolio
The company's brand includes such practical household necessities as "Chore Boy" scrubbing pads, "Chloraseptic" oral painkillers, "Compound W" wart removers and last but certainly not least on the humility totem pole, "Denorex" medicated dandruff shampoos. Its products are sold in such glamorous venues as Dollar Tree (Nasdaq: DLTR) and CVS Caremark (NYSE: CVS) drug stores.
Stable Revenue Streams
But this humble product lineup has been able to produce impressively stable annual sales numbers over the past several years. In fact, in its recently completed fiscal year 2009 (ended March 31), PBH was able to put up a top line sales number of $312.7 million, down only 4% from its $326.6 million from its fiscal 2008. (For more, see Spotting Cash Cows)
I, for one, am impressed that PBH was able to put up nearly flat year-over-year sales numbers during these extremely difficult economic conditions in which it seems virtually every public company is suffering substantially. Even this industry's 800-pound gorilla, Procter and Gamble (NYSE: PG), saw its Q3 2009 (also ended March 31) total net sales fall 8% from its third quarter of 2008.
Enviable Free Cash Flow
When you dig past the surface-level earnings, the first thing that stands out for Prestige Brands is its strong and consistent free cash flow generation. In the three years from 2006 to 2008, the company averaged $56 million in annual free cash flow.
Even during the tough economic times of the past year, Prestige Brands actually managed to grow its free cash flow by 49% over the prior year, coming in at $66.2 million for fiscal 2009. With its reported 50 million shares outstanding, that works out to $1.32 worth of free cash flow per share. (For more, see Analyze Cash Flow The Easy Way)
Far From a Prestigious Price
Yet, even with its consistent success, the market has steadily traded PBH shares downwards over the past few years. At market close on May 19, 2009, the stock was trading just above $6 after a rather steep sell-off, giving it a trailing free cash flow yield of 22%. At that price level, PBH shares could double in price before they could reasonably be considered fairly valued on a free cash flow basis!
Buyer Beware
The market may be primarily driven by fear right now, but we should be careful not to overlook the market's current discount on this stock's price -- there are a few valid risks to consider.
Most notably, the company's balance sheet reveals a substantial use of leverage, similar to its industry's competitors such as Procter and Gamble. But where a company like P&G has the advantage of size to mitigate some of the risks that come with leverage, Prestige Brands clearly does not, with its current market capitalization of only about $300 million.
If Prestige Brands fails to produce the cash flow it needs to service its substantial long-term debt load, the current $6 share price may very well prove to be about $6 too high. Add in the recent quarter's goodwill write-downs of $220 million, and there is enough uncertainty with Prestige to justify keeping it out of your portfolio for the time being.
The Final Word
That said, it would take truly devastating economic conditions to get consumers to stop buying products like dandruff shampoo, especially if they happen to be unemployed and looking for job interviews! So I expect PBH has a better chance than most companies of keeping its top line sales volume, and thus its bottom-line free cash flow levels, reasonably intact in the years to come. If that turns out to be the case, investors who buy at current prices may end up being able to look back on their PBH shares in the years to come as a source of prestigious returns for their portfolio. (For further reading, see Free Cash Flow: Free, But Not Always Easy)
by
Chris Gallant
Chris Gallant is a contributor for Investopedia. Chris graduated from the University of Alberta School of Business with a major in finance. Prior to writing for Investopedia, Chris spent time working with the Alberta Ministry of Finance, taught Business classes at the undergraduate level and helped manage a charitable equity fund for the University of Alberta.
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