Why Johnson & Johnson Should Buy Prestige Brands

| About: Prestige Brands (PBH)
This article is now exclusive for PRO subscribers.

Prestige Brands Holdings, Inc. (NYSE:PBH), together with its subsidiaries, engages in marketing, selling, and distributing over-the-counter healthcare and household cleaning products primarily in North America.

Many of you may not have heard of the company, but I guarantee you have seen or even used one of its products before. The following is a list of products the company holds:

  • Doctor's NightGuard
  • Doctor's BrushPicks
  • Efferdent Denture Cleaner
  • Effergrip Denture Adhesive
  • Clear Eyes
  • Murine Tears
  • CompoundW
  • Dermoplast
  • Pediacare
  • Chloraseptic
  • Luden's Cough Drops
  • Liquid Band Aids

Then there is Prestige's home division, which owns the Comet brand of cleaning products. It is said to be one of its strongest brands.

Johnson and Johnson (NYSE:JNJ) is a company with a very similar product line. They engage in the over-the-counter medication business, but are on a much larger scale of course. Some of the company's premium brands include Listerine, Tylenol, Band-Aids, Neutrogena, and Visine.

I believe Prestige would be a great acquisition target for JNJ due to its similar product offerings. This would allow for easy integration. Not to mention that JNJ would be able to eat up one of its smaller competitors at a very cheap price. The only issue that I would see with this acquisition is that JNJ does not have a household cleaning division. I would think the best case in this situation would be that the acquiring company should sell this division.

The Comet brand is fairly strong and has had strong revenues even during the down cycle. Originally, it was owned by Procter & Gamble (NYSE:PG) which sold it to Prestige Brands. P&G still has marketing rights in Europe for the product. I think a spin-off of this division would be a fantastic way for management to start focusing on their priorities, not to mention the amount of cash that would be generated from such a sale.

I really like Prestige Brands. The company has strong branding, but due to factors such as size and lack of ability to expand faster, it has not been able to reach its full potential. There is so much value hidden in the stock, but it has yet to be uncovered. I don't think it would be unreasonable to see the company acquired at even 1.5x the price, which would justify a valuation around $750 million. Even if this company doesn't get acquired, I still believe Prestige is set to go higher, it just might take a longer time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.