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 (NYSE:CBS) and Tyco International (NYSE: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 (NASDAQ: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 (NASDAQ:CAR), which spun off from Cendant. I had owned another Cendant spinoff, Realogy (NYSE: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: