HELEN OF TROY LTD HELE
May 04, 2012 - 12:51pm EST by
juice835
2012 2013
Price: 33.50 EPS $3.48 $3.85
Shares Out. (in M): 32 P/E 9.6x 8.7x
Market Cap (in $M): 1,072 P/FCF 8.1x 7.4x
Net Debt (in $M): 327 EBIT 0 0
TEV ($): 1,400 TEV/EBIT 0.0x 0.0x

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  • Consumer Goods
  • Founder Operator
  • Management Ownership
  • Misaligned Incentives

Description

Helen of Troy (HELE) is a $1 billion market cap consumer products company that has compiled an excellent long-term track record of 15% annual per share earnings growth over the past decade, proved surprisingly resilient during the recession, and yet trades at only 7.4x current year cash earnings of $4.54 per share.  (Cash earnings being defined as mid-point of recently released guidance plus intangibles amortization.)  This price is simply far too cheap for a decent consumer products company with good long-term results and impressive resilience during the recession. 

HELE was founded in 1968 by CEO Gerald Rubin.  Over the past decade, he has diversified the company away from its hair care appliance roots into a variety of other consumer product segments. The most important division today is OXO Brands.  OXO is a highly desirable premium brand for kitchen products which has grown revenues at 10% a year since its acquisition in 2002 and has expanded operating margins by 500 bps over that time.  Other product areas include #1 position in home-based cold and flu devices (i.e. vaporizers, humidifiers, etc.), hair care appliances such as dryers where they split the market with Conair, and niche bath brands Pert, Old Spice, etc.  Their most recent acquisition was the PUR division of Procter & Gamble which is a residential water filtration business; the vast majority of revenues are recurring in nature, driven by filter replacement. 

The company runs on a February fiscal year and reported earnings this past Friday.  In FY2012 (year just ended), HELE earned $3.48 in GAAP EPS.  Earnings are burdened by $22 million in intangibles amortization, so “cash earnings” for FY2012 (just ended) were $4.15.  Guidance for FY2013 (the year recently begun) is for $3.80 to $3.90 of GAAP EPS plus 69c of amortization which yields $4.54 of cash earnings at the midpoint of guidance.  At $33.50, the stock trades at a multiple of 7.4x. 

Recent History

GAAP EPS by fiscal year ending February (i.e. FY 2012 ended Feb 2012)

2007: $1.58

2008: $1.75 +11% (excludes tax benefit)

2009: $1.59 -9% (excludes impairment)

2010: $2.32 +46%

2011: $2.98 +28%

2012: $3.48 +17%

2013 guidance: $3.80 - $3.90 +11% at mid-point

EBITDA

2007: $87.4m

2008: $92.0m +5%

2009: $83.4m -9%

2010: $106.6m +28%

2011: $133.0m +25%

2012: $169.2m +27%

The year-over-year EBITDA comparisons are obviously less meaningful than the EPS comparisons due to the inclusion of acquisitions.  But my point in including both is not just that management has done a good job of growing EPS over the years (which are burdened by cost of financing acquisitions) but that the earnings and EBITDA (in a non-material acquisition year) held up impressively during the recession, each declining by 9%.  By and large, much of what HELE sells is a consumable or is unlikely to be deferred (e.g. vaporizer during flu season).  The exception is probably OXO Brands’ products which are high end kitchenware.  However, the brand did grow revenues by 7% in FY2009, the year of the financial crisis. 

 Recent Quarter

HELE announced their Q4 2012 results this past week and there were no real surprises.  They expect each of the three segments (Personal Care, Housewares and Healthcare/Home Environment) to achieve organic growth in FY2013.  The Personal Care segment does not generally show much if any organic growth, Housewares has grown steadily for a long time and Healthcare/Home Environment is comprised of two relatively recent acquisitions (Kaz and PUR) for which there’s not a great deal of historical information. 

 Balance Sheet

HELE has $327 million of net debt as of 2/28/2012 for 1.9x EBITDA leverage on an LTM basis.  This figure includes $160m of revolver financing for the PUR acquisition, with only a month of EBITDA contribution, and so tends to overstate the actual leverage ratio.  Further, the company is a prodigious generator of FCF due to its structurally low tax rate and minimal CAPX, so I would argue that the de facto leverage is even lower than it appears. 

Taxes

The company is incorporated inBermudaand has been grandfathered in by the IRS, giving it a sustainably low tax rate. Tax expense was 12.5% in FY2012 and is likely to creep higher over time as they make further acquisitions. 

Negatives / Concerns

Gerald Rubin has been a seller of stock in recent quarters.  Having said that, he is 68 and has a substantial portion of his net worth tied up in HELE stock ($50m worth at last count).

The company has a relatively thin bench at the corporate level.  It is clearly Rubin’s company and he has not sought to groom a successor. 

Rubin’s comp package is driven off pre-tax profits (which makes no sense, except to him), so the company is unlikely to undertake a serious share repurchase program, despite the fact that the stock trades at a highly attractive valuation. 

Disclosure: We and our affiliates are long Helen of Troy. We may buy / sell shares in the future. This is not a recommendation to buy or sell shares.

Catalyst

The compounding of earnings and the passage of time are the biggest drivers of expected return here.  Rubin’s possible retirement and a sale of the company to a private equity firm may happen at some point, but I would not expect that to be a near-term event. 
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