Prestige Brands Holdings Inc.
/ (PBH-NYSE) / $7.17Note to Readers: All new or revised material since the last report is highlighted.
Reason for Report: Minor Change in Estimates (2/7 brokers w. cvrg.)
Prev. Ed.: Nov. 14, 2007, 2Q08 Earnings Update
Brokers’ Recommendations: Neutral: 71.4% (5 firms); Positive: 14.3% (1); Negative: 14.3% (1) Prev.: Ed.: 4:1:1
Brokers’ Target Price: $13.00 (↓ $4.00 from the last edition of $17.00; 2 firms) Brokers’ Avg. Est. Return: 81.37%
Recent Events
On November 8, 2007, PBH announced 2Q08 earnings. Highlights are as follows:
· PBH reported total revenue of $87.3 million, an increase of 3.2% from revenue of $84.6 million in 2Q07.
· Operating income of $20.6 million was $3.5 million or 15.0% less than the comparable period's operating income of $24.1 million.
· Net income was $6.8 million or $0.14 per diluted share, as compared to $8.8 million or $0.18 per diluted share in 2Q07.
Overview
Analysts have identified the following issues as critical to evaluating the investment merits of PBH:
Key Positive Arguments / Key Negative ArgumentsStrategic Acquisition Pipeline: PBH is pursuing several small acquisitions, especially in the areas of over-the-counter drugs and cleaning products. Management recently acquired Wartner USA B.V., the third largest brand in the U.S. over-the-counter wart treatment category. / Acquisition Risk: PBH is currently seeking comparatively smaller acquisitions but, if a larger property that is strategic to the company’s plans is purchased, there may be integration risk. This could stretch an already-thin headquarters staff.
Outsourced Business Model: PBH engages only in those activities where it can add value, such as marketing and product development. It outsources manufacturing, thereby increasing margins and reducing or delaying exposure to raw materials cost increases. / Growth Difficulties: PBH’s markets are mature and key competitors are huge. PBH has little international exposure and a major global distribution effort would require significant infrastructure investment. As it grows, PBH must address the scalability of its business model.
Strong Brands and Excellent Cash Flow: Because of outsourced key activities and strong brands, PBH generates excellent cash flow. / Leveraged Balanced Sheet: Despite outsourcing, PBH carries higher debt (about 56% debt to capitalization) than most of its competitors, limiting its flexibility.
Exposure to Fast Growing Channels: Wal-Mart is experiencing rapid growth in PBH’s core products. So are other large PBH customers, such as Target. / Management Credibility: A series of disappointments that management has not adequately addressed has damaged PBH’s credibility, disappointed investors and increased the volatility of the stock.
Based in Irvington, New York, Prestige Brands Holdings, Inc. (PBH) is a holding company whose subsidiaries are engaged in the marketing, sales, and distribution of over-the-counter, personal care, and household cleaning brands to mass merchandisers, drug stores, supermarkets, and hospitals in the United States. The company’s portfolio of over-the-counter drugs consists of Clear Eyes, Murine, Chloraseptic, Compound W wart removal products, and first aid products, such as New-Skin and Dermoplast. Other brands in the category include Percogesic and Momentum, Freezone, Mosco and Outgro, Sleepeze, Compoz, and Heet. Its personal care products include shampoo, nail products, denture cushions, skin care lotion, skin salve, and barrier cream. These products are marketed under various brand names, which include Denorex, Cutex, Prell, Ezo, Oxipor VHC, Cloverine, Zincon, and Kerodex. The company’s household cleaning brands include Comet, and Spic and Span. For more information, the company’s website is www.prestigebrandsinc.com.
NOTE: The Company’s fiscal year ends on March 31; fiscal references do not coincide with calendar year.
January 4, 2008
Revenue
In 2Q08, PBH reported total revenue of $87.3 million, an increase of 3.2% from revenue of $84.6 million in 2Q07 and up 1% organically. The results were in line with the Zacks Digest report. Excluding the withdrawals, revenue went up 4% and 2% organically.
Revenue Detail by Segment as per the Company Report
Over-the-Counter Medicines (57% of total revenue)
In 2Q08, OTC revenue was $50.0 million, up 8.0% from $46.3 million in 2Q07. Excluding the effects of the Wartner acquisition in 2Q07 and the effects of the increased allowance for returns for the two Little Remedies(R) products, OTC organic revenue increased 5% y/y. The results were in line with the Zacks Digest report. Sales growth was led by the new Murine ear care product, which drove a 14% total Murine increase. Clear Eyes was also up a solid 6%, driven by a new Max Redness Relief product, while the Little Remedies business was up 4% y-o-y excluding the withdrawal impact. The Doctor's line of oral care continued to be negatively impacted by branded and private label competition, with factory sales declining year over year. PBH also indicated there was a 13% fall in sales for Chloraseptic due to retailers shifting ordering patterns closer to consumer demand, which should be made up for in 2H08.
According to the company, the Chloraseptic sales decline was a result of late ordering, as the majority of last year’s selling took place in August, with the balance in September, whereas this year’s seasonal build did not start until mid-to-late September. Comet sales were flat y/y as gains from a new product launch were offset by inventory destocking at Wal-Mart.
Household Cleaning Products (36% of total revenue)
In 2Q08, the segment recorded revenue of $31.4 million, at par with the revenue recorded in 2Q07. According to the Zacks Digest report, revenue at the segment was $31.4 million, up 0.5% from $31.3 million in 2Q07. The highlight of the segment was Comet, the segment’s largest brand, posting flat revenue growth as retailer inventory cuts caused shipments to trail 3% retail sales growth. Spic and Span sales declined by 9% year over year on a 3% POS (Point of Sale) decline, while Chore Boy posted strong 39% growth, aided by increased distribution.
Personal Care (7% of total revenue)
Personal Care revenue decreased 15.8% y/y to $5.9 million in 2Q08 from $7.0 million in 2Q07, as PBH is channeling investment away from this segment. The results were in line with the Zacks Digest report. Cutex and Denorex experienced sales declines, offset slightly by a modest revenue increase in Prell.
International
Internationally, sales declined 18% in the quarter after several quarters of double-digit gains as the company stopped shipping to a customer that was diverting its product. The company will look to build on this platform in the coming years.
Outlook
For FY08, the company expects organic revenue growth to be within its current long-term average growth rate of 1-3%, down from 3-4%, due to the sales impact of the Little Remedies withdrawals in 2Q08 and lower international sales as PBH has clamped down on product diversion. The company also expects total net revenue to be slightly higher as a result of a full year of the acquisition of the Wartner brand.
Revenue ($M) / 2Q07A / 1Q08A / 2Q08A / 3Q08E / 4Q08E / 2008E / 2009EOver the Counter Drug (OTC) / $46.3 / $42.4 / $50.0 / $47.3 / $45.5 / $185.0 / $191.7
Household / $31.3 / $29.9 / $31.4 / $29.7 / $29.8 / $119.9 / $123.1
Personal Care / $7.0 / $6.3 / $5.9 / $5.7 / $5.5 / $23.2 / $22.5
Total Revenue / $84.6 / $78.6 / $87.3 / $82.6 / $80.7 / $328.4 / $338.3↑
Digest High / $84.6 / $78.6 / $87.3 / $84.7 / $81.7 / $332.3 / $342.4
Digest Low / $84.6 / $78.6 / $87.3 / $81.6 / $79.7 / $325.7 / $334.0
Digest YoY growth / 3.6% / 3.2% / 3.2% / 3.4% / 3.1% / 3.0%
Sequential Growth / 11.5% / 0.8% / 11.1% / -5.4% / -2.4%
Highlights are as follows:
· For FY08, revenue projections range from $325.7 million to $332.3 million, with an average of $328.4 million (↔ with the previous estimate).
· For FY09, revenue projections range from $334.0 million to $342.4 million, with an average of $338.3 million (↑ from the previous estimate of $337.9 million).
The following is a graphical analysis of revenue segments:
Please refer to the Zacks Research Digest spreadsheet on PBH for detailed sales breakdown and future estimates.
Margins
According to the Zacks Digest report, gross margin was 51.1% in 2Q08, down from 51.2% in 2Q07. Operating income was $20.6 million, down 14.9% or $3.6 million from $24.2 million in the prior-year period.
In 2Q08, PBH reported operating income of $20.6 million was $3.5 million or 15.0% less than the comparable period's operating income of $24.1 million.
One firm (CIBC) believes that though gross margin was down y/y, however, if adjusted for the Little Remedies product withdrawals, gross margin would have improved 140 basis points as a result of favorable sales mix (higher margin OTC Healthcare) and cost-cutting programs. The firm also believes that contributing to the shortfall in operating profit was the abovementioned withdrawal, as well as higher legal expenses owing to a dispute with OraSure and actions taken to defend its intellectual property and patents for Doctor’s Night Guard.
Outlook
For FY08, management expects a significant increase in advertising and promotion spending to support the company’s brands and drive growth, fewer but more forceful new product introductions, and expansion of the international business. Thus, one firm (Suntr. RH.) noted that cost-cutting initiatives should be implemented in FY08 to offset the increase in advertising and promotion spending.
Management also pointed out the company’s efforts to realize cost of goods savings are beginning to take effect, providing some shelter from raw material price increases. The company has targeted a 13% reduction in its supplier base for fiscal 2008, and another 9% reduction for 2009. This could result in cost savings from at least two sources: better terms as additional business is concentrated with fewer suppliers, and streamlined coordination given a more manageable supplier base.
Outlook
As per Zacks Digest, cost of sales is expected to increase by 2.1% y/y in FY08 and 2.5% y/y in FY09, advertising and promotion expenses are expected to increase by 9.1% y/y in FY08 and 5.9% y/y in FY09 and G&A expenses are expected to increase by 17.8% y/y in FY08 and decrease by 5.2% y/y in FY09 against revenue increases of 3.1% y/y and 3.0% y/y in 2008 and 2009, respectively. Hence margins are expected to increase y/y at a constant rate in FY08 and FY09.
Margins / 2Q07A / 1Q08A / 2Q08A / 3Q08E / 4Q08E / 2008E / 2009EGross / 51.2% / 52.5% / 51.1% / 54.2%↓ / 52.4%↓ / 52.6%↓ / 52.9%↓
Operating / 28.6% / 29.4% / 23.6% / 29.7%↓ / 31.2%↓ / 28.4%↓ / 29.2%↑
Pre-Tax / 17.0% / 17.1% / 12.6% / 18.4%↓ / 19.9%↓ / 16.9%↓ / 19.0%↓
Net / 10.4% / 10.6% / 7.8% / 11.4%↓ / 12.4%↓ / 10.4%↓ / 11.7%↓
Please refer to the Zacks Research Digest spreadsheet of PBH for further details on valuation.
Earnings per Share
According to the company, 2Q08 net income was $6.8 million or $0.14 per diluted share, a shortfall from $8.8 million or $0.18 per diluted share in the prior-year quarter. The results were in line with the Zacks Digest report. However, on an adjusted basis after excluding $0.02 EPS impact from product withdrawals and $0.04 of EPS impact from legal expense, EPS would be $0.20.
One firm (Merrill) believes that a $0.02 decline in EPS was due to the voluntary withdrawal of infant cough/cold medicine and the remainder was related to lower-than-anticipated sales and higher expenses.
Outlook
Net income is still projected to be below sales growth due to a significant increase in advertising and promotion spending, and higher legal expenses. However, after adjusting for the Little Remedies product withdrawal and the absence of certain tax benefits in fiscal 2007 that are not expected to be repeated in fiscal 2008, the company expects reported net income growth to outpace total net revenue growth in FY08. Acquisitions, if any, would be incremental to that growth.
One firm (Merrill) believes that a shift to later Chloraseptic sell-in could result in a 2H08 benefit at the detriment of 1H08, but inventory reductions at retail for Comet and heavy competition in other brands also weighed on results, as did higher legal expenses, a portion of which should continue in 2H08.
EPS / 2Q07A / 1Q08A / 2Q08A / 3Q08E / 4Q08E / 2008E / 2009EZacks Consensus / $0.19 / $0.20 / $0.69 / $0.80
Digest High / $0.18 / $0.17 / $0.14 / $0.20 / $0.21 / $0.72 / $0.83
Digest Low / $0.18 / $0.17 / $0.14 / $0.17 / $0.17 / $0.64 / $0.78
Digest Avg. / $0.18 / $0.17 / $0.14 / $0.19 / $0.20 / $0.69 / $0.80
Digest YoY growth / 0.0% / -22.2% / -9.5% / 16.0% / -4.0% / 15.3%
Sequential Growth / 5.9% / 0.0% / -17.6% / 35.7% / 3.8%
Highlights are as follows
· For FY08, EPS estimates by analysts range from $0.64 to $0.72, with an average of $0.69 (↔ with the previous estimate).
· For FY09, EPS estimates vary between $0.78 and $0.83, with an average of $0.80 (↔ with the previous estimate).
Please refer to the Zacks Research Digest spreadsheet of PBH for further details on valuation.
Target Price/Valuation
Of the 7 analysts covering PBH, 1 analyst has given a positive rating, 5 have given neutral ratings and 1 has given a negative rating.
Target prices given by analysts range from $9.00 (Piper Jaffray) to $17.00 (Sidoti). The Digest average target price is $13.00 (↓$4.00 from $17.00 as reported in the previous report). The analyst with the lowest target price (Piper Jaffray) used P/E multiple of 11x FY09E EPS to compute the target price. The analyst (Sidoti) with the highest target price used 13x FY2009 FCF per share estimate of $1.25, equal to a 7% FCF yield as the basis of valuation.