(By Mani) Prestige Brands Holdings, Inc. (NYSE: PBH) offer attractive value to investors despite having outperformed the market handily since the recent rally began in early June.
Prestige Brands is a marketer of well-known consumer products in niche categories, including Chloraseptic for sore throat relief, and Comet household cleaners.
The PBH stock has far outpaced the recent market rally over the past few months and was up 26 percent since early June versus 11 percent appreciation for the S&P 500 during the same period.
"We continue to be impressed by the dramatic change at PBH over the past three years, and view it as one of our favorite value names," Oppenheimer analyst Joseph Altobello wrote in a note to clients.
Over the past three years, Prestige Brands has essentially doubled its revenue to over $600 million on an annualized basis, largely through acquisitions. These include Blacksmith Brands in November 2010, Dramamine in January 2011 and a portfolio of 17 OTC healthcare brands from GlaxoSmithKline (NYSE:GSK) earlier this year. The GSK transaction added about $200 million in incremental revenue and increased its top line by roughly 50 percent.
However, in addition to these discrete financial benefits, the company pointed out that its increased size and broader product portfolio, particularly in OTC healthcare, have enhanced the company's importance to retailers when it comes to the level of interaction and collaboration on topics such as future product introductions and merchandising activity.
"In addition to improving its positioning with retailers, we believe PBH has also improved its positioning with regard to future acquisitions, which are expected to remain a key growth driver," the analyst said.
Having established itself as the largest independent over the counter (OTC) healthcare company in the world, PBH has now become the "first call" for large pharmaceuticals and consumer products companies looking to divest small and medium-sized OTC healthcare brands deemed non-core.
On the M&A front, many of the companies that have competed with PBH for acquisitions in the past have either been acquired themselves (i.e.,Chattem), moved up market to focus on larger transactions—i.e., Church & Dwight (NYSE:CHD)—or are currently limited in their access to capital (i.e., privately held Insight Pharmaceuticals).
Further, Prestige Brands has an advantage over potential financial buyers, including private equity, in that it can leverage its existing scale and infrastructure in order to realize revenue and cost synergies. Consequently, the company can generate healthy EPS growth for the foreseeable future with only modest topline growth..
"We estimate that with the acquired GSK brands and very modest capital expenditures, PBH should deliver over $100 million (or $2 per share) in free cash flow annually, which provides it with ample financial flexibility either to pursue additional acquisitions or reduce debt," Altobello said,
If it opts to cut debt, the potential reduction in interest expense alone could drive mid-single digit EPS growth, before any improvement in operating profit. In addition to lower interest expense, another EPS lever for the company to pull is that of G&A, where it has a rather impressive track record.
The company's gross margin should benefit through improving product mix, both organically and through acquisitions. Its future acquisition activity will be focused exclusively on the higher margin OTC healthcare segment, while the growth of its OTC business continues to outpace that of its Household Cleaners segment, which has been declining at varying rates in recent quarters.
The key risk to the story remains the pending return of Johnson & Johnson's (NYSE:JNJ) Children's Tylenol brand, which has been absent from store shelves since being recalled in September 2009.
"We believe this risk is overstated, as Prestige Brands has been positioning itself for this eventuality for some time now through brand investment," Altobello added.