Despite rising oil prices and political concerns in the Middle East and North Africa, the cruise industry continues to recover from its 2009 downturn. Moving into the second half of the year, industry leaders Royal Caribbean (NYSE:RCL) and Carnival (NYSE:CCL) are both seeing higher pricing as consumer demand outweighs supply. That's good news for Steiner Leisure (Nasdaq:STNR), which provides spa services on 152 cruise ships, in addition to 69 land-based spas.
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Financially Sound
Over the past 10 years, Steiner's gross and operating margins have never been less than 21% and 8.8% respectively. With the exception of 2009, it has managed to increase operating profits yearly with its earnings per share growing 12% annually between 2001 and 2010. Its balance sheet is pristine with zero debt and $45 million in cash. In the first quarter ended March 31, 2011, revenues grew 15.1% year-over-year to $168 million with operating earnings increasing 36.7% to $16.4 million. Free cash flow increased almost five-fold to $10.9 million from $2 million in the first quarter of 2010. Expect it to initiate a dividend in the near future, given its share price hasn't done much in recent years and there's plenty of excess cash. That, or it makes another big acquisition like the $100 million Bliss purchase from 2009.

Growth Strategy
It currently operates spas on 19 cruise lines and in hotels in 17 different countries, and aims to expand its relationships with many of these cruise ship and hotel operators so that additional spas open as they come online. Case in point is the Bliss and Remede brand of products and services. Currently available in 11 U.S. hotels under Starwood's (NYSE:HOT), W and St. Regis banners, it seeks to expand this arrangement and there's little reason to think it won't be successful.

At the end of the day, hotels and cruise ships need amenities, and Steiner does spas better than most. The company's other main source of revenue is products, including Bliss and Remede. It believes growing the customer base on the service side of its business will lead to additional product sales. In 2010, product revenues were $209.5 million. Five years ago, they were just $73.3 million. The two segments very much go hand-in-hand. A great deal of its business development involves obtaining contracts from existing customers and potential new ones, and there's always a risk that you lose a contract. It's a very competitive business. Having said that, five years ago, it serviced 126 ships and now it handles 152. With the size of the ships getting bigger and fancier, it provides even greater opportunity for the company. The cruise ships are a profitable niche business that gives it the ability to grow the number of hotel spas at a conservative pace; thus keeping expenditures reasonable. It's a brilliant business model.




Company


P/S


P/FCF


EV/EBITDA


Steiner Leisure (Nasdaq:STNR)


1.04


12.51


8.58


Stewart Enterprises (Nasdaq:STEI)


1.20


13.57


8.49


Pre-Paid Legal Services (NYSE:PPD)


1.45


9.20


4.86


Regis (NYSE:RGS)


0.35


6.64


4.85


VCA Antech (Nasdaq:WOOF)


1.30


18.19


8.66


Stock Price and Valuation
The table above shows four peers from the personal services industry - two bigger and two smaller by market cap. At first glance, Steiner appears to be trading at fair value, if not cheap. The three valuation metrics are very comparable to its peers, and so I'll look at its historical returns as well as its stock price to determine if today is a good entry point. Steiner's cumulative total return for the past 10 years, ended June 10, 2011, is 169.5%, which compares to 15.3% for the Dow Jones U.S. Total Stock Market index. That's more than satisfactory.

However, over the past five years, Steiner's cumulative total return is 9.5%, just 340 basis points higher than the index. This says that a majority of its performance came between 2001 and 2006, when it went from $16.64 to $40.95. Since then, although it dropped below $20 in early 2009, it's primarily been range bound from $35 to $45. By not paying a dividend, its newer shareholders haven't seen too much appreciation. That's about to change. Steiner's stock has hit $50 exactly twice in its 15-year history as a public company. The first time was in 2007, and the second in May 2011. Back in 2007, its gross and operating margins were very similar to today, yet its P/S ratio was 35% higher at 1.4. The same multiple today implies a stock price of $60.41. When the market stabilizes in the next few months, its stock price is likely to break through $50 and stay there for some time.

The Bottom Line
Steiner is one of those long-term stocks you buy, hold and buy some more whenever its price gets low as it did in March, 2009 - you won't regret it. (For related reading, also take a look at Peer Comparison Uncovers Undervalued Stocks.)

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Tickers in this Article: STNR, RCL, CCL, STEI, PPD, RGS, WOOF

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