The Sweet Smell of Parlux Fragrances

Alan Greenspan has called the recent bloodbath in the financial markets a once in a generation event. A quick scan of the Wall Street Journal shows that very few stocks have been spared the market's wrath.

However, until the last week, shares of Parlux Fragrances (PARL) had performed exceptionally well in the face of the mounting financial crisis. Unfortunately over the course of the last week, shares of Parlux Fragrances have been punished to the tune of 25% off the recent high to a closing price of $5.31 on September 17 due to the bloodbath the market has become. The recent price action brings to mind the adage "Buy when there is blood in the streets". Certainly, Wall Street has not been bloodier in quite some time.

To recap Parlux's recent stock performance, shares had risen from a low in the $3.00 range in June 2008 to over $7 per share. The rally started with the company's stellar earnings report in June 2008, continued with high expectations for the launch of the Jessica Simpson fragrance line and more recently Parlux Fragrances received a boost from an upgrade to Buy (from Hold) from Wedbush Morgan. Prior to the June 2008 earings report, I pointed out on several occasions that shares of Parlux Fragrances traded at discounts of up to 50% below tangible book value per share which I find completely irrational for a company operating with breakeven results.

Circling back to the impact of this week's recent market turmoil, shares of Parlux Fragrances are once again trading at tangible book value. At the present price, investors are provided with what is I believe the most compelling risk/reward scenario since I began to cover Parlux Fragrances.

At this point we know that the Jessica Simpson fragrance line is a major success. Reports of department stores across the county placing reorders after selling out of product are numerous. Promotional activities are running very high including cross promotions with other Jessica Simpson branded products, recent and upcoming television endorsement appearances, print advertising and upcoming personal appearances.

There can be little doubt that the exceptional demand for the Jessica Simpson line combined with continued success from the Paris Hilton and Guess lines caused Parlux Fragrances to recently increase its revenue target to $200 million for the current fiscal year. One could expect the continued rollout of the line domestically and internationally to help Parlux generate $250 million in sales in fiscal 2010 excluding the impact of the launch of the highly anticipated Queen Latifah line.

Ironically, at a time when almost all risks related to the Jessica Simpson product launch have been removed, shares of Parlux Fragrances are trading at a deeply discouted price that fails to recognize the upcoming sales and profit growth associated with the new line. In his recent letter to shareholders, CEO Neil Katz once again targets $300 million in annual revenues for Parlux Fragrances. It would be reasonable to expect over $1.00 in EPS and share price between $15.00 to $20.00 under such a scenario.

In this writer's opinion, shares of Parlux Fragrances represent a STRONG BUY for long term investors able to withstand short-term volatility in the markets. Remember to apply the adage, Buy when there is blood in the streets in regard to Parlux Fragrances.

Disclosure: Long PARL.

Comments

[TraveLotch:]

I am long PARL, the turmoil has shaken a lot of people off though. As I watch the book, there are some traders consistently trying to short the stock, and have been successful today, the stock went below $5 when Dow rallied. I think these short term sellers will have to cover their positions and jump on the "longs" board sooner or later.

2008 Sep 18 03:56 PM

[Rickcasey67:]

And where is this letter Mr Murphy?

2008 Sep 18 11:03 PM