Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:
The Household Name Nobody Knows by Michael Santoli
Summary: Around for more than a century, Chattem Inc. (CHTT), is nevertheless not a household name, though you can probably find its products around your house. The maker of over-the-counter brands of balms and ointments such as ICYHOT pain-relief products, Gold Bond powders and Selsun blue shampoo increased its stable and nearly doubled its revenue earlier this year when it bought Unisom sleeping pills, Cortizone cream, ACT mouthwash, Balmex diaper-rash ointment and anti-diarrhea product Kaopectate from Pfizer. Barron's says Wall Street, too, has neglected the stock because of its relatively small $1.1B market cap when compared to household-products giants Procter & Gamble and Colgate-Palmolive. Meanwhile, the company has high and sustainable margins; a record of double-digit profit growth; and a discounted stock valuation to other consumer-products companies. Based on sell-side estimates for 2008 earnings of $3.57/share, Chattem is trading at just 16.5x profits vs 18-19x for its peers. If the company were to earn $4, as some buy-siders suspect, the multiple would fall to below 15 -- "near bargain territory," according to Barron's. Estimating free cash flow of $5/share next year, one portfolio manager believes the stock, which closed Friday at $59.75, could be near $80 12-18 months out. The company boasts pretax, pre-interest margins of 30%, and over the past five years has had annualized sales growth of 19% and per-share earnings gains of 25%. Chattem CEO Zan Guerry told Barron's: "I'd be disappointed if five years from today we haven't grown revenue by more than 10% and earnings more than 20%" annually.