Stephan Company: A Profitable Net-Net Stock

Feb. 3.11 | About: The Stephan (SPCO)

Stephan Company (NASDAQ:TSC) makes hair grooming and personal care products. The company is an extremely interesting net-net stock, as they are solidly profitable, actively buying back stock, pay a nice dividend (2 cents per share per quarter, or 8 cents annually), and making small acquisitions to add to their product lines... almost unheard of for a net-net stock.

They operate in two segments: distributors, which sell to distributors who eventually sell the product to salons and barbershops, and brands, which sells products directly to mass merchandise, drug stores, and distributors. The distributor segment accounts for about 75% of the revenue but generates negative operating income (-281k operating income on $14.31m in rev. 2009, -351k on 13.65m in 2008), while the brand segment generates ~25% of revenue but over 100% of operating income ($1.15m of op. income on 3.71m in rev. in 2009, 1.15m on 4.89 in 2008).

The company currently trades for $2.64 per share despite over $2.90 in net current assets. Most net-nets trade for distressed prices because their core business is bleeding money, dying, or both. However, TSC is actually pretty profitable even once consolidating the unprofitable segment with the profitable one (they earned $873k in operating income last year and are on pace to earn a bit more than that this year), the balance sheet is strong (over $7m in cash vs $2.5m in total liabilities), and they are buying back shares hand over fist (over 200k shares, or 5% of shares, in the first nine months of 2010). Shares currently trade for ~4.75x EV / EBIT, and there is room for improvement by improving the profitability of the distributor segment (or closing it down and investing the resources into the profitable brands segment) or synergy/improvement from their recent acquisitions (they purchased another personal care company for 930k in Feb. 2010 and have a history of making these type of bolt-on acquisitions). Plus, the company has federal NOL’s carry forwards of $3.8m, so as business improves they won’t need to pay taxes.

The company, however, is not without risk. Mainly, disclosure is limited. They provide very little information in their 10-k and even less in the Qs. The company is also a bit player in a fiercely competitive industry. While they have a history of solid cash generation, the competitive nature of the industry could quickly erode that past. The company also has a couple of outstanding lawsuits; while the charges don’t look major and the potential awards in the event of a loss likely wouldn’t be large, there is that risk as well.

However, the risks in this name are largely priced into the incredibly low valuation. As long as the company continues to return cash to shareholders through stock buybacks and dividends and avoids a disastrous acquisition, an investor at today’s prices should be well rewarded. Any turnaround in the distributor segment would only add to the potential returns.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.