Helen of Troy: A Stock to Launch a Thousand Buyers?

The great thing about down markets is that people get scared. When they are scared, they tend to sell anything, no matter what the story is. For patient buyers, others' fears can lead to wealth.

This seems to be the case with Helen of Troy (HELE). The stock has recently tanked, even though earnings were strong. Why? HELE sells a lot of low-end retail products (OXO kitchen supplies, hair care products, beauty products, etc.), and everyone is afraid of a recession. This stock, despite years of great sales and earnings performance, is incredibly unloved. It currently trades at around 7 times earnings.

Is their business getting hurt by the slowing economy? Definitely. In the last quarter, their beauty segment suffered a 6% sales decline. But by cutting out low-margin SKUs, they are actually seeing their margins improve, their earnings grow, and their cash balance swell. And it's not all bad news. Their kitchen segment actually reported sales growth in the quarter. And they continue to invest in new lines of business.

I was very impressed how their SG&A costs came down so much. These guys know how to manage their business.

They are getting so much cash that they believe they will pay off ALL of their debt in the near term. They said on the conference call that they have $100 million in cash, more than the $87 million they had at the end of the quarter.

Valueline estimates they will have $30 a share in sales by around 2010 and $2.80 in profits! That would mean they are trading at 5.2x future earnings.

Here's how Jefferies & Co. analyst Douglas M. Lane calls it: "While we are cautious on the U.S. consumer overall, we think the shares provide a very compelling valuation at current levels and view the stock weakness as a good entry point." He thinks the stock should be priced at $21.

I tend to agree.

Disclosure: Author has a long position in HELE

Comments

[CK:]

I enjoyed reading your article but your analysis falls short. Their last quarter surprised on the upside, but their earnings have been on a flat to down trend since 2005. It currently trades at 7x PE, but that isn't that cheap if you consider that they are expected to grow earnings by 8% in 07/8 and 6% in 08/09. 1xPEG seems reasonably valued especially considering how many headwinds the US consumer is facing - if oil prices can come down, this company should definitely benefit, but that's a big if.

"Valueline estimates they will have $30 a share in sales by around 2010 and $2.80 in profits." These numbers are very ambitious on the earnings line. They are expected to make $1.70 in 07/08. $2.80 in profits implies a 13% earnings growth rate if they are to hit that target by the end of 2011 and an 18% growth rate if they make it by the end of 2010. If they can grow at that rate, I'd be very very surprised.

2008 Jan 11 04:30 PM

[Chungst:]

You do bring up good points in that HELE has been consistently profitable in the past and its current earnings yeild is over 10% and should remain at 10% (barring any significant downside earnings surprises) at these current price levels.

The latest balance sheet reveals HELE has significant cash and investment balances and that easily amounts to $2 a share in surplus cash.

2008 Jan 13 01:53 AM