Another Great Deal For Helen Of Troy

I have followed and written about consumer products company Helen of Troy (Nasdaq:HELE) for a long time, and yet I still find myself surprised at how the company operates. Simply put, this company just has a knack for finding attractive deals and pulling the trigger - common sense would dictate that other would-be rivals would look around and see the same business conditions and compete against these accretive opportunities for Helen of Troy. IN PICTURES: 9 Simple Investing Ratios You Need To Know

The Latest
Helen of Troy's stock spiked on Thursday on the company's announcement that it would be buying consumer products company Kaz for $260 million - a purchase that the company will fund largely out of debt. A privately-held company, Kaz sells a wide range of products in the personal care and houseware space, including air purifiers, fans, thermometers and humidifiers. Although the company has some of its own brands, a lot of Kaz's sales come from licensed brands like Vicks and Braun [both from Procter & Gamble (NYSE:PG)] and Honeywell (NYSE:HON). That is almost a perfect match for how HELE operates, and the two companies should fit together exceptionally well.

Solid Financial Reasons For The Deal
According to HELE, Kaz is on track to produce about $400 million in sales. That suggests an exceptionally good valuation on the deal, though on a price-sales basis, it is not much different than the valuations on companies like Newell Rubbermaid (NYSE:NWL), Jarden (NYSE:JAH) or Lifetime Brands (Nasdaq:LCUT). What is interesting about that comparison, though, is that all of those companies also have rather low returns on capital. That raises the question of just how well-run Kaz is and if HELE is buying a problem. (For related reading, check out How To Use Price-To-Sales Ratios To Value Stocks.)

On the flip side, HELE management has shown above-average skill in integrating acquisitions and bringing acquired business up to their operating level. Taking that to the next level, if HELE can add Kaz's revenue base to their operations and produce the same sort of cash flow from this business, the deal will pay for itself in fewer than six years. To that end, management indicated in the press release that they expect the deal to be accretive next year - though that proves little more than that Kaz is profitable (or that HELE can quickly make it so).


A Solid Business ... But with Some Spots
Even with Thursday's big jump, HELE stock trades at a pretty attractive level. I have long complained about the company's approach to executive compensation and the company's financial results have been more volatile on a year-to-year basis than the business suggests they should be. Nevertheless, this is a company that steadily builds shareholder value and has that uncanny knack for spotting attractive acquisitions. (For more, see Helen Of Troy's Winning Acquisitions.)

At some point, HELE will probably have to prove that it can build brands of its own - as the company grows larger, it would seem logical that other consumer products companies like P&G would be less willing to license its brands to a potential rival. Still, keep in mind that HELE is far smaller than P&G, Colgate Palmolive (NYSE:CL) and Church & Dwight (NYSE: CHD) and does not really have the same sort of scale or self-developed brands (though the acquisition of OXO a while back might qualify), and yet has no problem producing as much free cash flow from each dollar of revenue it generates.

The Bottom Line
All in all, that makes Helen of Troy an extremely interesting idea for patient investors who can sit tight while this company just keeps the ball rolling and accumulating value. (For more, see Mergers And Acquisitions: Introduction.)

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