In this article I'll discuss Sally Beauty Holdings (SBH) Q3 financial results and its balance sheet. This will result in my investment thesis and a proposed option play at the end of the article.
The Q3 Financial Results
Sally's revenue increased by 2.8% to $912M, up 2.8% from last year's $887M. As General and Administrative expenses rose at a rate of just 1.4%, the company's operating earnings increased by 4.4% to $142.6M. This resulted in a 13% increase in the earnings per share, from $0.38 to $0.43.
Looking at the financial results for the first nine months of the year (Sally Beauty Holdings' year ends at the end of Q3 of the calendar year), revenue increased by 2.8% as well, but more importantly the net profit increased by 17.3% to $196.3M and the earnings per share increased by 24.2% to $1.13. This fast increase in EPS was mainly caused by the lower share count, as the average weighted amount of outstanding shares decreased by 6% compared to the first nine months of the 2012 fiscal year.
The Balance sheet
Sally Beauty Holdings has a very healthy working capital position of in excess of half a billion and is thus in an excellent position to continue its share buybacks which it started in March of this year. SBH repurchased 3.1M shares in Q3, and has $560M left under its share buyback program. As the share price dipped after the release of the financial results, I would imagine Sally's is busy buying more of its shares on the market right now and the share count will drop even further.
The company's book value was -$294.4M which translates into a book value if -$1.74/share. This is obviously something I don't really like to see as a relatively conservative investor.
Sally Beauty Holdings seems to be on track to generate a net profit of $1.50/ share for the financial year 2013 (based on the $1.13 profit per share in the first 9 months) which translates into a price/earnings ratio of a little bit higher than 18. This might seem quite expensive, but don't forget this is a growth stock and its earnings are expected to increase, as the average analyst estimate for the 2015 financial year is a profit of $2.15/share. I think this might be a little bit conservative as I think Sally Beauty Holdings will continue its aggressive share buyback program. I'm personally aiming for an EPS in excess of $2.20 based on a 8.25% net profit margin, a $4.1B revenue and 155M outstanding shares (which would be a reduction of approximately 13M shares with a value of $351M from the average weighted amount of outstanding shares in Q3 2013).
Although Sally Beauty Holdings dropped after releasing financial results, I would prefer to write put options instead of outright buying the common shares. I'm specifically looking at the P25's for December 2013 which have an option premium of approximately $0.85. I still don't feel very comfortable with the negative book value and would actually hope the company would try to build up its book value instead of initiating a share buyback, so I'm currently hesitating to initiate a long position.