Blyth's Value Potential

Feb. 3.11 | About: Blyth, Inc. (BTH)

Blyth (NYSE:BTH) sells an extensive collection of accessories including candles and lotions. The company trades with a P/E of just 7, despite a ttm return-on-equity of almost 15% and despite having more cash than it does debt.

Blyth derives the majority of its sales in an unusual way: at home parties. The company has about 20,000 active U.S. sales "consultants" who organize parties for their friends/acquaintances and make a commission of sales they generate at these parties. For those unfamiliar with this selling model, it may appear to be fad-ish or pyramid-like, but the company has been successful/profitable in this way for over a decade as a public company.

But while the company's P/E ratio is low and its return-on-equity is impressive, there are a couple of noteworthy items that may interest the value investor. For one thing, sales have been declining long before the recession hit. The company is facing competition for similar products from regular retailers and, of course, online channels (where Blyth competes as well). Therefore, while some of Blyth's sales declines are no doubt cyclical, there is likely also a secular component to the declines as well. The good news is that the company has been cutting expenses quickly as well; recently, its profits have risen despite lower sales levels, suggesting the company has had some success with some of its productivity-growth initiatives.

Second, the company's earnings are artificially high over the last 12 months as a result of a large tax benefit. In the last holiday quarter, Blyth paid taxes of just $2.5 million on earnings before taxes of $34 million. Ordinarily, Uncle Sam would not put up with such a low payment for long. However, in Blyth's case, the silver lining is that the company has tens of millions of dollars in losses that it can carry forward for tax purposes, but these are jurisdiction-specific and not a sure thing by any means.

Blyth is cheap and may offer investors both potential upside and decent downside protection. However, potential investors should be sure to have a strong grasp of the company's true earnings power before jumping in.

Disclosure: No Position