Beauty Is in the Eye of the Stockholder

02/09/2011 12:22 pm EST

Focus: STOCKS

Taesik Yoon

Editor, Forbes Investor and Forbes Special Situation Survey

Personal care marketer Helen of Troy has been unjustly punished for a pending acquisition, writes Taesik Yoon of Forbes Growth Investor.

Aided by improving domestic economic conditions and smart acquisitions, Helen of Troy (Nasdaq: HELE) has enjoyed solid sales growth and stronger than expected profits in recent periods.

Fiscal third-quarter net sales climbed 8.2% year-over-year to $205 million. Housewares sales grew 6% to $58.5 million, boosted by solid demand for food storage containers. Contributions from the Pert Plus and Sure brands acquired in early 2010 helped personal-care sales grow 9.2% to $146.5 million. The operating margin shrank by 38 basis points to 15.39% primarily because of higher promotional expenses associated with newly acquired brands. Nevertheless, net income increased 9.4% to $27.1 million or 86 cents per share. This was 9 cents better than expected.

Yoon Table 1

Despite these results, some investors may be concerned with the balance sheet impact of the company’s recent agreement to acquire health-care products maker Kaz, Inc. for $260 million. This will likely increase HELE’s debt to more than $320 million from just $131 million the prior period.

Nevertheless, this will still only represent about a third of total assets of the enlarged company. As such, we view the pending acquisition as positive. It expands the company’s product offerings to include vaporizers, humidifiers, thermometers, blood-pressure monitors, air purifiers and other health-care products marketed under well-recognized brands such as Vicks, Braun, Honeywell, Stinger, Softheat, and Kaz.

The transaction is expected to be accretive in fiscal 2012, which begins next month. Indeed, HELE expects the acquisition to add 40-50 cents for the year, resulting in full-year earnings of $3.40 to $3.50 per share. At the mid-point, this represents growth of 22.8% over the current consensus estimate for fiscal 2011 of $2.81 per share.

Aquisition-related Costs Graph

Acquisition-related costs and increased marketing expenses to promote its newly acquired brand could hurt the operating margin. Over the near term, this should be partially offset by the company’s successful efforts to expand the gross margin, which grew by 115 basis points in the fiscal third quarter. Over the longer term, as cost-saving synergies materialize, we expect to see margins rebound strongly.

Management is optimistic based on the improving economic conditions in North America. It also believes innovative product introductions will help position the company for sustained growth.

[Last month, Yoon recommended ITT Corp (NYSE: ITT), whose shares jumped 15% within days after the company unveiled a breakup plan—Editor.]

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