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The Little Consumer Company That Could
Noted value investment manager Jeremy Grantham at GMO recently remarked that the market is in for "seven lean years" of performance as consumers adjust to living a thriftier lifestyle. The housing and stock market crashes have destroyed years of wealth accumulation in such a relatively short period of time that it is unlikely that consumers will engage in their free spirited spending ways of yesteryear.
IN PICTURES: Eight Ways To Survive A Market Downturn
Under the Radar
While this recession has affected all businesses, it's going to hurt some more painfully than others. Retailers are one group that comes to mind. Unless you're Target (NYSE:TGT) or Wal-Mart (NYSE:WMT) and offer your wares at very attractive prices, retailers will likely have to adjust to slower sales volume for years to come as folks forgo the $130 designer jeans and opt for a quality Target look for a fraction of the cost. (For more, see Recession-Proof Your Portfolio.)
One under-the-radar company that investors may want to explore is Prestige Brands Holdings (NYSE:PBH). Many investors and analysts look at Prestige as a mini Procter and Gamble (NYSE:PG).
Prestige sells housing cleaning and personal care products like Comet all purpose cleaner, Spic and Span, Clear Eyes eye drops, as well as shampoos, oral care and skin care products. Prestige's products can be found in grocery stores, mass club merchandisers and dollar stores like Wal-Mart, Publix, CVS (NYSE:CVS), Family Dollar (NYSE:FDO) and Dollar General.
The Prestige Model
Despite the fact that many of Prestige's brands aren't as well known as Procter and Gamble, this little business has several favorable characteristics. First Prestige likes to focus on smaller, less competitive niche categories and dominate those markets. Over 75% of revenues are derived from brands that are #1 or #2 in their categories.
Also, the company throws off gobs of free cash flow as the company focuses on outsourcing as much of its overhead as possible. Free cash flow was over 21% of sales for the twelve-month period ending March 31, 2009. For that particular fiscal year, free cash flow was over $66 million. With 50 million shares outstanding, that comes to $1.32 per share in free cash flow. At the current price of $7.48, the free cash flow yield per share is nearly 18%. Two years before that, Prestige earned nearly $45 million and $72 million in free cash flow, respectively.
Moving Along
Investors may balk at the $360 million in debt against a company with a $373 million market cap. But the cash flow generation easily covers the annual interest expense which has been declining over the years.
At the current share price, Prestige is closer to fair value than what I would call a bargain. Yet the company has a very light cap ex spending model and sells low ticket consumer staples with relatively stable sales. Any stock price decline may give investors a neat little play on a stable, boring business. (For further reading, A Guide To Consumer Staples.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
IN PICTURES: Eight Ways To Survive A Market Downturn
Under the Radar
While this recession has affected all businesses, it's going to hurt some more painfully than others. Retailers are one group that comes to mind. Unless you're Target (NYSE:TGT) or Wal-Mart (NYSE:WMT) and offer your wares at very attractive prices, retailers will likely have to adjust to slower sales volume for years to come as folks forgo the $130 designer jeans and opt for a quality Target look for a fraction of the cost. (For more, see Recession-Proof Your Portfolio.)
One under-the-radar company that investors may want to explore is Prestige Brands Holdings (NYSE:PBH). Many investors and analysts look at Prestige as a mini Procter and Gamble (NYSE:PG).
Prestige sells housing cleaning and personal care products like Comet all purpose cleaner, Spic and Span, Clear Eyes eye drops, as well as shampoos, oral care and skin care products. Prestige's products can be found in grocery stores, mass club merchandisers and dollar stores like Wal-Mart, Publix, CVS (NYSE:CVS), Family Dollar (NYSE:FDO) and Dollar General.
Despite the fact that many of Prestige's brands aren't as well known as Procter and Gamble, this little business has several favorable characteristics. First Prestige likes to focus on smaller, less competitive niche categories and dominate those markets. Over 75% of revenues are derived from brands that are #1 or #2 in their categories.
Also, the company throws off gobs of free cash flow as the company focuses on outsourcing as much of its overhead as possible. Free cash flow was over 21% of sales for the twelve-month period ending March 31, 2009. For that particular fiscal year, free cash flow was over $66 million. With 50 million shares outstanding, that comes to $1.32 per share in free cash flow. At the current price of $7.48, the free cash flow yield per share is nearly 18%. Two years before that, Prestige earned nearly $45 million and $72 million in free cash flow, respectively.
Moving Along
Investors may balk at the $360 million in debt against a company with a $373 million market cap. But the cash flow generation easily covers the annual interest expense which has been declining over the years.
At the current share price, Prestige is closer to fair value than what I would call a bargain. Yet the company has a very light cap ex spending model and sells low ticket consumer staples with relatively stable sales. Any stock price decline may give investors a neat little play on a stable, boring business. (For further reading, A Guide To Consumer Staples.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Sham Gad
Sham Gad is the Managing Partner of Gad Partners Fund's, value inspired investment partnerships modeled after the Buffett Partnerships of the 1950's. Previously, Gad ran the Gad Investment Group and delivered annualized returns of 22% from 2002 to 2005. Gad is also the author of "The Business of Value Investing" which will be out in the fall of 2009. Gad earned his MBA at the University of Georgia in May of 2007. Gad runs a value investing blog. He can also be reached by visiting the Gad Partners Funds site. When not writing or analyzing businesses, Gad enjoys hanging out with his wife Maggie, reading, golf, and yoga
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