Diamond Hill Capital Above 5% of Steiner Leisure

We can compare Steiner to Regis Corporation (NYSE:RGS), a primarily lower-end owner and franchisor of hair salons (including, for example, Supercuts). Regis’s revenue was down 10% last quarter from its levels in the fourth quarter of 2011, and earnings were quite low. We’d note that activist investor Jeffrey Smith of Starboard Value has a substantial position in the company (find Starboard’s favorite stocks and read our coverage of its recent purchase). Regis’s stock trades at 29 times forward earnings estimates, obviously a very large premium to Steiner’s valuation; over 20% of Regis’s outstanding shares are held short. It’s possible that some traders are forming a pair trade by going long Steiner and short Regis, and depending on the cost to borrow Regis shares to short that might be an interesting play. It’s certainly the case that Steiner appears to be a better value.

If we leave aside relative value possibilities, then we are less positive on Steiner. Even with the potential for continued buybacks, we would prefer to see more growth in the business; if we strip out the recent acquisitions the company actually seems that it might be shrinking at least in terms of operating income. We certainly find the industry attractive, and it seems intuitive to us that beauty care products and services should be a growing business. Perhaps Steiner is best placed on a watch list as a value stock- not interesting enough to buy for now, but with some strengths to its name and a good prospect if it does demonstrate organic growth.

Disclosure: I own no shares of any stocks mentioned in this article.