The Stephan Company (NASDAQ:TSC) engages in the manufacture, sale, and distribution of hair care and personal care products on wholesale and retail basis. It operates in three segments: Professional Hair Care Products and Distribution (Professional), Retail Personal Care Products (Retail), and Manufacturing.
The current CEO, Frank Ferola, had decided to take the company private at basement price in 2004. A resulting proxy fight blocked the transaction, and added Mr. Richard Barone (who runs Ancora Capital) to the Board of Directors.
Linked is a letter written by Richard Scott, a investment manager and significant shareholer, filed with the SEC to the company addressing CEOs compensation and low takeover price in 2004.
Since that time, a few notable value investors have been accumulating shares in the company, holding a combined 42.6% of outstanding shares, and a number of special dividends have been declared.
% of Shares held (from the company's 2006 proxy filing)
Yorktown Avenue Capital 16.3%
David M. Knott 8.7%
Richard L. Scott 10.1%
Richard Barone 7.58% (On the Board of Directors)
CEO Frank F. Ferola holds slightly over 20% of the shares outstanding.
Stephan's balance sheet is relatively strong. The company has 7.5 million dollars in cash, 2.3 million dollars in accounts receivables, and 6 million dollars in inventory against 6.4 million dollars in debt (As of September 30 2006).
I assign a positive cash value to the company's balance sheet of 6 million dollars after all liabilities (valuing cash at 100%, accounts receivable at 80% of their stated value, inventories at 50% of stated value and liabilities at 100%).
The company also owns two warehouse facilities in Florida, which are worth a few million dollars, but I cannot determine the exact market value of the properties at this time.
Over the past 9 months, The Stephan Company created 1 million dollars in free cash flow after all capital expenditures. Over the past nine months end September 30 2006, the company has maintained its professional segment at around 700K in income (similar to the nine month period ended in 2005) , while significantly improving the profitability of the company's Retail (398K vs -25K) and Manufacturing segments (-97k vs -636k).
The company is on track to create of 1.2 million dollars in free cash flow in 2006. Net Income is currently shielded from taxes until the exhaustion of about 2 million dollars in net operating loss carry forwards. This should shield the company from paying taxes on income for the next 18 months.
With 4.4 million shares outstanding and a market price of 3.62 million dollars, the current market capitalization of the company is 16 million dollars. With a balance sheet containing 6 million dollars in cash and 2 wholly owned warehouse facilities, the effective market price of the company ranges between 8-10 million dollars (market capitalization minus asset values beyond all obligations)
The company's last reported quarter was its best quarter in over 3 years. If this performance could be replicated, the intrinsic value of the company could grow significantly.
With 1.2 million dollars in cash flow generation and a turnaround in retail and manufacturing segments underway, the company can be purchased at 7 times cash flow. Though this is not a screaming buy, the company's last quarter was their strongest quarter in the past few fiscal years, with the possibility of the company to grow their income year-over-year quite quickly from this point.
Net income is also artificially low due to the high pay of the CEO. If Mr. Ferola was to step down or his pay significantly reduced (he received 800k a year in compensation in 2005 and has a very healthy golden parachute preventing the company from removing him at this point), the company could boost income 500k to 1 million dollars in conjunction with additional cost cuts (high auditing and consulting fees for 2006).
A catalyst for the stock price is also the high concentration of value managers who had been purchasing additional shares in 2006 and could push the company to sell itself or individual segments or brands of the company.
TSC 1-yr chart
Disclosure: Author does not hold any shares in The Stephan Company