HELE's Q3 earnings guidance, a penny shy of analysts' expectations, hurt them. Yet HELE has held firm on its 2005 guidance of $2.50 to $2.70, first raised on April 30 and reiterated May 13, July 12, and Oct. 12. (Reuters) Its Q3 sales guidance on Oct. 12 was for an increase of 15% to 21% YOY.
EPS and sales have been growing nicely (up 20 and 28% TTM) but my sense is that sales would have continued to grow less fast than earnings, ultimately a problem, and perhaps the reason behind the OXO acquisition.
HELE has a very small float (20 mil shares) and a small increase in demand or increase in short-covering could help the stock start moving again. To that end, a 2% increase in institutional ownership occurred in the last 3 months (Reuters)
On valuation measurements I tend to look for, HELE scores well: a PEG of .80 vs. 1.37 for Appliance and Tool sector and 1.58 for S&P 500; P/B of 2.19 vs. 5.59 and 3.98. Since 2000 it has grown its net profit margin from 4.8% to 15.1% COGS and SG&A expenses appear to be under control. ROE also has moved up nicely, from 7.9% to 20.4% (ValueLine).
Since 2000 it has sported a low PE (around 11), yet has grown EPS 14.5% annually, which tells me it is granted little respect and confidence. It's had plenty of time to be discovered!
Cash balance is down and inventories are up, a flag. And HELE does not compare as strongly in P/CF, asset and inventory turns. Other than the ERP system mentioned below, I'm not sure what management is doing to address this. So I am skeptical of management's operational abilities; can they execute? The Tactica experience didn't exactly instill confidence. Yet I am willing to see how management does with OXO for a few quarters; perhaps some OXO management will come over?
I view HELE as a dramatically different company with the OXO acquisition. So I recently started a new position, after selling in April and missing around $4 or so to the peak in July. IMO, HELE nows sells a far wider range of everyday things that people want and need, at fair prices, which people are going to buy regardless of the economy. A recent Fool column referred to HELE as an "aging beauty," which I think is unfairly harsh and doesn't look to the future. After all, OXO should add $100 mil in sales annually to this $500mil company. The column was also critical of its cash flow, but FWIW Value Line shows a steady increase of cash flow per share, from $.83 in 1999 to $2.64 in 2003. You bring up a good point about HELE's cash outlays, yet one hopes the spending will slow or are one-time events.
Recent 10-Q items that struck me as encouraging:
During the second fiscal quarter, we substantially completed Phase 1 of development and implementation of a new Global Enterprise Resource Planning system. On September 7, 2004, we went live on the new system. With the implementation of this new system, most of our businesses run under one integrated information system. We believe this system will help to promote uniform business processes and practices amongst our subsidiaries. We are currently in the process of closely monitoring the new system and making normal and expected adjustments to improve its effectiveness.
• We continue to expand our brand offerings in our Skin Care Category. On September 29, 2004, we acquired certain assets related to the worldwide production and distribution of TimeBlock® and Skin Milk® body and skin care product lines from Naterra International, Inc. TimeBlock® is a line of clinically tested anti-aging skin care products. Skin Milk® is a line of body, bath and skin care products enriched with milk proteins, vitamins and botanical extracts. The Company paid $12,000,000 in cash in the transaction funded out of the Company's revolving line of credit. We currently project the brand acquisition to contribute approximately $15,000,000 of sales in fiscal 2006.
Graham Fair Value calculation, using Yahoo estimates:
Company: HELE
Date: 10/17/04
Next year's expected earnings: $2.80, vs. low estimate of $2.90 and high of $3 (note the declining trend)
EPS growth rate used for estimate: 8%, vs. consensus of 12%
Multiple Graham used for estimate: 8.5
Graham Fair Value: $48.29
Current Price: $27.94
$ difference: $20.35
Percent Growth to Fair Value: 72.85%
A personal aside: A few months I was at some friends, helping put on a dinner. Knowing how much I like to cook, the wife there says, "Look at my cool new measuring cup." She was right, it was cool, and it was one of those "why didn't I think of it" moments. Only then did I see it was an OXO brand and later saw that HELE had acquired it. "A patented angled surface lets you read measurement markings by looking straight down into the Cup and eliminates the need to fill, check and adjust the amount of liquid you are measuring."
The cool cup: oxo.com |
