Chattem, Inc.: Familiar Brands, Outstanding ROE

| About: Chattem Inc. (CHTT)

Chattem, Inc. (CHTT) has more well-known brands than most of the ranches in Texas. Over-the-counter drugs make a bundle of money for Chattem, which also makes and sells personal care products and dietary supplements. Chattem's products include pain treatments such as dental analgesic Benzodent, topical analgesic Aspercreme, Icy Hot joint and muscle pain reliever, and Pamprin menstrual symptom reliever. The company also makes the Melatonex sleep aid, medicated powder Gold Bond, Bullfrog sunscreen, and Mudd clay-based facial mask. Chattem sells its products to wholesalers and retail merchandisers. The company in 2006 acquired five brands (Balmex, Kaopectate, Unisom, Cortizone, and Act) from Johnson & Johnson (NYSE:JNJ).

That last bit, about the acquisitions from J&J, is where the high debt level comes from. It recently issued $85 million in convertible senior debt and a $15 million warrant transaction. Part of the proceeds will be used to hedge against the potential dilution upon conversion of the convertible into common stock. Some of the warrant funds will go to pay down credit facilities.

The company is still on the acquisition prowl. In May, it bought the rights to ACT, an anti-cavity mouth wash used in Western Europe along with the worldwide trademark rights from Johnson & Johnson. Look for the brand name to go global. And with current assets at almost 3 times current liabilities, there's more cash available for more purchases.

Earnings are the story here. In the last 5 years, earnings per share averaged 36.5% growth annually. Sales rose by 14% a year, on average in the same time period. Over then next 5 years, analysts predict EPS to grow by 17% a year, on average, while sales increase by 13% a year, on average. Anlaysts are looking for a 50% growth in eps this year due to increased demand for Gold Bond, a number of new products from the Icy Hot line, and continued growth from Dexatrim, Pamprin and Selsun products.

Sales should show a marked increase this year, thanks to the new lines from J&J. Analysts predict as much as $90 million in revenues from this group. That's almost one-fourth of all sales. Total revenues in 2004 were $258.2 million. This year, look for $415 million and $450 million next.

Some other numbers to consider: officers and directors own 9.2% of the company. Net profit margin was 12.5% last year, with expectations of 13.6% this year and 15.6% next year. Market cap is $1.2 billion with only 18.9 million shares outstanding. Return on Equity is outstanding at 34%.

The stock's history shows strong volatility. In 2000, it was selling for $2.30 a share (split adjusted for a 2 for 1 split in 2002). Then it hit $22.80 in 2002, only to retrace to $11.50 in 2003. Then it took off again, going to a new high of $47, only to lose ground and bottom out at $28 a share in 2006. Now it's at all time highs with better earnings forecast. But the earnings growth is not as robust as it has been. That's something to be aware of as you dig deeper into this stock that is carrying a relatively high P/E ratio of 22. If eps only increases by 17% a year, the stock may be a little bit ahead of the earnings growth. On the other hand, it's hard to find stocks that return 34% a year on equity.

CHTT 1-yr chart


Disclosure: none