Recently, Prestige Brands Holdings, Inc. (NYSE:PBH) experienced a significant gain of nearly 11% in one day, from $30.34 per share to $33.65 per share, after it announced that it acquired the privately-held healthcare distributor Care Pharmaceuticals. Shareholders of Prestige Brands must be quite happy as the company’s share price has advanced four times since November 2011.
Prestige Brands Holdings, Inc. (NYSE:PBH) is in the portfolio of several famous investors including Joel Greenblatt and Wallace Weitz. Should we buy Prestige Brands at its current trading price? Let’s find out.
A cash cow OTC healthcare business
Prestige Brands Holdings, Inc. (NYSE:PBH) is considered the provider of branded, over the counter (OTC) healthcare and household cleaning products in North America, operating many brands including Chloraspetic, Clear Eyes, Compound W, Dramamine, and Chore Boy. Most of its revenue, $536.9 million, or 86% of the total revenue, was generated from the OTC Healthcare segment, while the Household Cleaning segment contributed only $86.7 million in sales in 2012.
OTC Healthcare was also the main profit contributor with $240.74 million in operating income, whereas the operating profit of the Household Cleaning segment was much lower at $15.85 million.
I am quite impressed with the historical growth of the company. Its revenue has increased from $313 million in 2009 to $624 million in 2013. However, during the same period, net income has fluctuated in the range of ($187) million to $66 million. Its net income came in at $66 million, or $1.27 per share, in 2013. Prestige Brands Holdings, Inc. (NYSE:PBH) is also a cash cow. In 2013, it generated as much as $138 million in operating cash flow and $127 million in free cash flow.
With the acquisition of Care Pharmaceuticals, Prestige Brands Holdings, Inc. (NYSE:PBH) will become the owner of the Fess line of cold/allergy and saline nasal health products and Rectogesic for rectal discomfort, distributed in Australia, New Zealand, and other countries in Asia Pacific. Matthew Mannelly, Prestige Brands’ CEO, is bullish about the acquisition. He mentioned that the acquisition would give the company a platform for growth in the Asia Pacific region with a product portfolio that complements Prestige Brands’ OTC product lines.
Highly leveraged operation with high valuation
Investors might be worried about the company’s high leverage level. As of March 2013, it had $478 million in total shareholders’ equity, $16 million in cash, and as much as $971 million in long-term debt. Prestige Brands booked a high amount of goodwill and intangible assets on its balance sheet, of $1.54 billion, which could be quite vulnerable to a potential future write-down.
At $33.65 per share, the company is worth more than $1.7 billion. The market values Prestige Brands at more than 12 times its trailing EBITDA (earnings before interest, taxes, depreciation, and amortization).
Compared to its peers The Clorox Company (NYSE:CLX) and Johnson & Johnson (NYSE:JNJ), Prestige Brands seems to be the most expensively valued. The market values Clorox at 11.55 times its trailing EBITDA. Clorox is a global consumer giant, owning a number of leading brands. Around 90% of its brands have number one or number two global market shares.
Looking forward, the company estimates that it could grow its revenue by 3%-4% and increase its earnings to $4.25-$4.35 per share. The free cash flow growth could reach 9%-10% in 2013 and increase to 10%-12% from 2014 onward. In the past seven years, Clorox has repurchased as much as 40% of its total outstanding shares. Moreover, it has also doubled its dividend in the past five years. At the current trading price, The Clorox Company (NYSE:CLX) offers its investors a 3.4% dividend yield. Investors could expect Clorox to keep returning cash to its shareholders.