Still Confident in Sally Beauty's Intrinsic Value

Sally Beauty Holdings (SBH) was up 4.65% today, January 29, 2007. Part of the reason for Sally Beauty’s stock price rise yesterday may be due in part to this past weekend’s Barron’s 2007 Roundtable article. Sally Beauty Holdings was one of Oscar Schafer’s picks for this year’s roundtable.

Oscar Schafer is Managing Partner of O.S.S Capital Management. Looking back at his 2006 roundtable picks, I noticed his picks performed exceptionally well over the past year. His past picks included two spin-off stocks, CBS (CBS) and Tyco International (TYC). Tyco was actually his worst performing pick for 2006, gaining only 1.4%. This might be in part because Tyco did not successfully complete its spin-offs last year. In 2006, he also picked FNX Mining (TSE: FNX), Flamel Technologies (FLML), and Schwarz Pharma (FRA: SRZ) gaining 23.5, 51.9, and 80.5 percent respectively.

Schafer mentioned that he finds opportunities in spinoffs. As my readers know here, I’m also a big fan of spinoffs. In addition to picking Sally Beauty this year, Schafer also picked Avis Budget Group (CAR), which spun off from Cendant. I had owned another Cendant spinoff, Realogy (H) that performed very nicely for me.

Getting back to Sally Beauty, Mr. Schafer actually labeled this pick controversial. I’m not so sure what is controversial about it, but I guess this is another reason to like the stock. Schafer points out that Ebitda margins are in the range of 11% to 12%, and growing. He also finds it very positive that Clayton Dubilier & Rice bought around 48% of Sally Beauty Holdings for about $6.75, and it is known that private-equity firms plan to make two to three times their money in three to four years. I hope CD&R is right.

One thing I learned from this article was that CEO Gary Winterhalter has been discussing opening two to three hundred stores in Mexico and a major expansion in Canada. Schafer sees the company earning 40 to 42 cents a share in 2007 and then climbing to 55 to 60 cents a share in 2008. With accelerating international expansion, Schafer see the stock climbing to $12 next year. I hadn’t really factored in the international expansion when I analyzed this stock, but it makes good sense to me that this would be an excellent direction for this company. This further enhances my confidence in my initial estimate of $10 for Sally Beauty Holdings intrinsic value.

Full Disclosure: I own shares of Sally Beauty Holdings.

SBH 3-month chart: