You may never have heard of Prestige Brands Holdings (PBH), but you’ve certainly heard of, and likely used, many of its products, notes Doug Gerlach, editor of Small Cap Informer.
Prestige Brands markets over-the-counter products, including Luden’s cough drops, Compound W wart remover, Chloraseptic throat spray, Clear Eyes eye drops, Gaviscon antacid, Efferdent denture cleaner, Summer’s Eve feminine hygiene products, Dramamine motion sickness pills, Comet kitchen cleaner, and Spic ‘n’ Span floor cleaner.
Prestige Brands seeks brands and portfolios with long-term sustainable brand-building capability, and considers return on invested capital to be the key financial decision factor. Since 2013, the company has invested more than $1.7 billion in five acquisitions.
Since 2009, Prestige Brands has grown both sales and earnings per share at an annualized 17.1%. Acquisitions are a key part of the company’s operational strategy.
For the full fiscal year 2018 (ending March 31, 2018), management expects revenues to be up 18% over fiscal 2017 and EPS to reach $2.58. We project future EPS and revenue growth of 12% over the next five years. This is in line with Wall Street analysts’ long-term estimates.
Prestige Brands’ pre-tax profit margins declined in 2016, bucking a longer-term up trend, but the first three quarters of the current fiscal year seem to indicate that profitability is back on track, averaging 20.3%. If the momentum holds for the fiscal year, margins will be at or very near the highest in a decade.
Returns on equity have been at a healthy level above 15% in recent years as well. Free cash flow is very strong, and management boasts that its free cash flow conversion (Non-GAAP Operating Cash Flow less Capital Expenditures over Adjusted Net Income) is best in class amongst a world class peer group.
The company is highly leveraged, with debt-to-equity at 272% at the end of fiscal 2016, and total debt to total capital at 72% as of the end of the third quarter. Management has been working hard to decrease its debt load and reduce its cost of capital
We are capping our expected high P/E ratio through 2021 at 22, which equates to a high price of $82. On the downside, a slide of the P/E to as low as 12 times trailing 12-month EPS of $2.11 would mean a low price of $25. The stock is a buy up to $39 at a present upside/downside ratio of 5.8:1. A potential 19.5% annual total return is possible.
