Steiner Leisure Ltd (STNR): Is This Beauty Products Business a Buy Now?

In the past 12 months, Steiner Leisure Ltd (NASDAQ:STNR) has under-performed the general market. While the S&P 500 has gained more than 17.9% in the period, Steiner Leisure has only increased by 13.9%. Interestingly, the company was featured in Barron’s as one of the six stocks which could double in the next five years, potentially giving investors a sweet annualized return of 15%. Let’s take a closer look to determine the attractiveness of Steiner Leisure Ltd (NASDAQ:STNR) at its current trading price.

Consistent growth, conservative capital structure but high goodwill

Steiner Leisure has different operations in four main business segments: Spa operations, products, schools and laser hair removal, focusing on spa, hair and skin-care products and services. Some $42.5 million, or 64.6% of the total income, was generated from the spa operations segment. The products segment ranked second with more than $17.5 million in operating profits while the operating income of the schools and laser hair-removal segments were $3.8 million and $7.7 million, respectively.

In the past four years, Steiner Leisure Ltd (NASDAQ:STNR) has managed to consistently grow its top and bottom lines. Revenue increased from $491 million in 2009 to $811 million in 2012 while net income rose from $38 million to $53 million in the same period.

What I like about Steiner Leisure’s business is its cash flow generation. Since 2003, its operating cash flow has grown from $27 million to $99 million, while free cash flow climbed from $20 million to $69 million in the past 10 years. The company also had quite a conservative capital structure. As of March, it had $362 million in equity, $72 million in cash and $133 million in total debt. However, what makes me worry is its high level of goodwill and intangible assets of $417 million.

Relatively cheaper than its peers

At $52.80 per share, the company is worth $774.2 million. The market does not value Steiner Leisure Ltd (NASDAQ:STNR) cheaply, at 10.1 times its trailing earnings before interest, taxes, depreciation and amortization (EBITDA). However, compared to its peers including Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA), and Sally Beauty Holdings, Inc. (NYSE:SBH), it is still the cheapest among the three.

At $100 per share, Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) is worth around $6.3 billion in market cap. The market values Ulta Salon the most expensive, at 15.9 times its trailing EBITDA. The high valuation might be due to the impressive growth performance in the first quarter 2013.