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Beauty Care Product Manufacturer Is Sitting Pretty
Posted: Jan 13, 2009 14:27 PM by Will Ashworth
In December, ratings agency Fitch issued a severe warning for consumer product companies in 2009 due to the global recession. It predicts that even while commodity prices have fallen substantially, reducing expenses for these companies, sales will recede dramatically as consumer's switch to store brand products. However, in this competitive industry, Alberto-Culver Company (NYSE:ACV) can hold its own during this economic downturn.
Five Years of Change
Alberto Culver's growth has been slow and steady, rising from $963 million in fiscal 2004 to $1.4 billion in fiscal 2008 with earnings from continuing operations growing from 1.7 million in 2004 to $106 million in 2008. In that five-year period, two important events took place. In 2004, it cut earnings by $34.4 million because of several items including an early redemption of $200 million in 8.25% senior notes and the conversion of one class of common stock. Adding these items back into earnings and 2004 would have produced approximately $36 million in net income.
The second event, was its spin-off of its Sally Beauty Holdings (NYSE:SBH) division; selling 47.6% of the beauty supply company to a partnership run by private equity firm Clayton, Dubilier & Rice. Existing shareholders received one share in the new company for every Alberto Culver share held along with a $25 a share special dividend. The results since the separation have been excellent. (Companies use M&As and spinoffs to boost profits - learn how you can do the same by reading Cashing In On Corporate Restructuring and What Are Corporate Actions?)
Another Solid Year in the Books
Alberto Culver had a good fiscal year ended September 30, 2008. Highlights included organic growth of 8.7%, pre-tax income, excluding restructuring and discrete items, increased 33% to $178.1 million from $133.9 million and sales and profits were up in both its domestic and international markets. Despite the positive results, in November, a Citigroup (NYSE:C) analyst downgraded it to "hold" from "buy" stating that it was too expensive. At the time, the stock was trading at $25.73, approximately three dollars more then where it sits today. Rationale for the downgrade: The stock outperformed the market by 40% in 2008. However, the analyst did feel that the company would experience healthy growth in 2009. Translation: In these markets, we're afraid of stocks that do well and just want to be on the safe side.
Matches Up Well Against Competitors
Alberto Culver, when compared to industry peers Church & Dwight (NYSE:CHD), Procter & Gamble (NYSE:PG) and Colgate-Palmolive (NYSE:CL), is the only stock of the group to keep its head above water in 2008. It managed to produce a slight gain with losses varying between 3.5% for Church and Dwight to approximately 15% for both P&G and Colgate Palmolive. They all outdid the S&P 500, which lost more than 40%. On top of this, a look at the company's key statistics reveals a financially healthy, profitable enterprise. With less than $1 million in debt, it produces almost $200 million in EBITDA. Holding over $4.60 in cash, it can easily pay its $0.26 annual dividend. Its valuation metrics compared to its competitors are either similar or lower, creating what I consider a very safe place to invest your money. (Find out how these numbers can be applied strategically to select stocks in Fundamental Analysis For Traders.)
Bottom Line
Company founder Leonard Lavin and his daughter, Carol Bernick, own 14% of the outstanding stock. It's nice to see a family business transitioning in good shape. During an economic rough patch consumers will tighten their purse strings. Will they cut down on name brand soap just yet? I'm not convinced. Usually luxury goods and services get cut first, so when name brand soap and cleaning products become considered "luxuries" it might be time to reconsider.
By Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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