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.
Its net sales rose by nearly 23% to $582.7 million while the net income grew by 20% to $41.8 million, or $0.65 per share. Its comparable-store sales increased by 6.7%. For full-year 2013, the company intends to grow its comparable-store sales by 4% to 6%, including the e-commerce business impact. The growth in EPS is expected to stay in the low end of Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)’s long-term target of 25% to 30% growth. The number of net new stores is expected to be 125 with 22% growth in its square footage.
Sally Beauty Holdings, Inc. (NYSE:SBH) also has a higher valuation than Steiner Leisure Ltd (NASDAQ:STNR). At $31.10 per share, Sally Beauty is worth nearly $5.3 billion on the market. The market values Sally Beauty at 12 times its trailing EBITDA. Sally Beauty Holdings, Inc. (NYSE:SBH) has a good distribution network, with 4,560 stores, including 200 franchised units in both America and Europe. Sally Beauty has kept growing its business with the consistently positive comparable-store sales growth in the past three years. In 2012, its same-store sales growth reached 6.4%.
Sally Beauty Holdings, Inc. (NYSE:SBH)’s main business is hair products with around 45% of its total revenue, including 22% from hair care and an additional 22% from the hair-color products. For the full year 2013, the company expects to grow its store base by 4% to 5% via both organic growth and acquisitions. Moreover, it also increased the customer traffic with its loyalty programs and customer-relationship management. Sally Beauty plans to increase its gross margin through its customer shift to retail, its focus on exclusive brands and low-cost sourcing.
Among the three, Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) is the most profitable company with the highest return on invested capital at nearly 25.2%. Sally Beauty Holdings, Inc. (NYSE:SBH) ranked second with 17.3% ROIC while the ROIC of Steiner Leisure Ltd (NASDAQ:STNR) is the lowest, at only 11.2%.
My Foolish take
What makes Steiner Leisure attractive is its relatively cheap valuation. According to Barron’s, Diamond Hill small-cap fund manager Tom Schindler mentioned that the company might rise by 13% next year and 19% in two years thanks to an increase in vacation spending. However, I personally do not think Steiner Leisure Ltd (NASDAQ:STNR) is a steal at the double-digit EBITDA multiple, due to its low profitability and its high level of goodwill and intangible assets.
Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Ulta Salon, Cosmetics & Fragrance. The Motley Fool owns shares of Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA), Cosmetics & Fragrance.
Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Is This Beauty Products Business a Buy Now? originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
