Prestige Brands Holdings, Inc. (PBH), Johnson & Johnson (JNJ): The Quest for a Hidden Bargain, Not Over Yet!

Prestige Brands Holdings, Inc. (NYSE:PBH) produces a wide variety of over-the-counter medications and household cleaning products, a lot of which are very well-known names. Despite this, the company does not get too much attention from the market, with most of the sector’s focus on larger names such as Johnson & Johnson (NYSE:JNJ) or Colgate-Palmolive Company (NYSE:CL).

One of my favorite things to do is to investigate these “under the radar” stocks and compare them to their big brothers in an effort to find hidden bargains. Let’s take a look at Prestige and see if it is indeed worth a look.

About Prestige

Prestige Brands Holdings, Inc. (NYSE:PBH) operates two segments, OTC Healthcare and Household Cleaning. Of the OTC Healthcare segment’s 14 core brands, many are household names, such as Chloraseptic sore throat medications, Clear Eyes eye drops, Luden’s cough drops, Dramamine, and several other well-known brands. The Household Cleaning segment includes such brands as Comet and Spic and Span.

The company’s products are primarily sold through large retailers, grocery stores, and drug stores. Prestige’s biggest customers are Target, Wal-Mart, Kroger, Publix, CVS, Walgreen, and Kmart. Over the past, the company has grown its stable of brands through acquisitions, and by aggressively promoting its core brands.

Valuation and growth

Prestige Brands Holdings, Inc. (NYSE:PBH) trades for 18.5 times forward earnings, which is quite frankly a little higher than I would expect for a company of this nature. The consensus calls for earnings of $1.49 for fiscal year 2013 when the company reports earnings on May 16. This is projected to rise to $1.61 and $1.69 over the next two years, for earnings growth of 8% and 5%, respectively. Not exactly a rapid growth company…

Additionally, the company’s balance sheet is very highly leveraged, with barely any cash and over $1.1 billion in debt (their entire market cap is only $1.4 billion). Over the past seven years, the company has averaged a forward P/E multiple of 13.6 times earnings, and I really don’t see any reason why it’s trading at such a premium.

The alternatives

To confirm my suspicion about Prestige Brands Holdings, Inc. (NYSE:PBH) being too expensive, let’s examine some of its “big brothers”, Johnson & Johnson (NYSE:JNJ) on the OTC Healthcare side and Colgate-Palmolive Company (NYSE:CL) on the cleaning products side of the business.

One of the largest health care companies in the world, and one of the most diverse, Johnson & Johnson has revenue of over $67 billion annually. In addition to being “cheaper” than Prestige at 15.7 times forward earnings, Johnson & Johnson (NYSE:JNJ) pays a very nice dividend that yields around 3.10%, which has been raised every single year in recent history.

The company has a projected forward growth rate of around 6.5%, at par with Prestige Brands Holdings, Inc. (NYSE:PBH); however its balance sheet is much better. Unlike Prestige, which has a debt level almost as large as its market cap, Johnson & Johnson (NYSE:JNJ) has a net cash (cash minus debt) position of almost $10 billion.