Time to Load Up on Beaten Down Parlux Fragrances

"Be fearful when others are greedy but be greedy when others are fearful" is one of Warren Buffet's most frequently repeated quotes.

After watching the market take its toll on shares Parlux Fragrances (PARL) this week, many investors are trying to determine whether to be fearful or greedy. During the first three days the week of January 14th, Parlux shares fell from $4.00 to $3.17 on volume of less than 500,000 shares. Unlike plenty of other companies reporting results and guidance below expectations, I am pleased to note that Parlux reported absolutely nothing. Mr. Market has for no apparent reason thrown the Parlux baby out with the bath water.

As I have noted before, Parlux Fragrances trades below its book value per share which is north of $5.00. At its present price of $3.36, Parlux Fragrances sports a market capitalization of $66 million which is far less than its working capital of approximately $80 million or its book value of $111 million simply proving the market's ability to be irrational for long periods of time.

Today, I offer another approach to determine the value of Parlux Fragrances. Quite simply, the true, independent current value of Parlux Fragrances can be identified by looking back to the sale of Parlux's Perry Ellis fragrance line. The Perry Ellis line, which generated revenues of approximately $75 million and gross margins of 50% plus, was sold to an independent third party for $63 million in order to help rescue the company.

This leads to the obvious question of what would the Paris Hilton and Guess! lines be worth if they were sold. The Paris Hilton line is on track to generate in excess of $100 million in revenues this fiscal year while the Guess! line is now tracking in excess of $30 million annually. The gross margins on both lines are similar to those of the Perry Ellis line. Certainly the sale of these two lines would generate in excess of $100 million using the Perry Ellis line as a comparable sale. Additionally, the Nicole Miller and Jessica Simpson licenses would likely generate a minimum of $10 to possibly in excess of $20 million in value. Lastly, the collection of Parlux accounts receivable and payoff of its vendors would generate approximately $23 million.

As a result of this sum of the parts valuation, Parlux Fragrances should be worth approximately $123 to $133 million of market cap; or twice today's paltry sum of $66 million. In order to be somewhat conservative, this approach assigns no value to any of Parlux's other brands including the intriguing but underperforming Ocean Pacific line.

To be clear, I am not calling for the sale or breakup of Parlux Fragrances. In fact, I believe that Parlux is emerging from a dramatic turnaround into a growth company under the direction of Neil Katz. My point is to simply point out the tremendous potential value that Mr. Market's irrational behavior has created. This writer is going to take full advantage of Mr. Buffet's sage advice and be greedy while others are fearful with respect to shares of Parlux Fragrances.

Disclosure: Author is long PARL.

Comments

[Joel2040:]

Are you not the guy that just trashed TMY with one of your "Seeking Alpha" articles? In that article you stated (You Opinion) that the deal with Lorrie and the company had less than a 10% chance of being financed. Well how do you feel now that the company conference call from Monday (1/14) just blew your theory right out your backside? Based on those projections what gives you the right to make assumptions on ANY other stock and have any credibility at all. If you want my honest opinion (and I am sure you do not) you should write under a new headline called "Seeking the TRUTH"! You were so wishy washy with TMY I doubt that anyone will read your articles much less believe them. I know I will not!

2008 Jan 17 09:19 PM

[wishful:]

Last I heard the income tax hasn't yet been abolished yet you assume none on the hypothetical sale of its assets.

2008 Jan 19 08:21 PM