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
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.
Colgate-Palmolive is one of the largest consumer products companies in the world, with such brands as Ajax, Colgate, Irish Spring, Softsoap, Speed Stick, and Toms of Maine. Although it is the most expensive of the three at 21 times forward earnings, it also has the best projected growth, at almost 9% going forward, according to consensus estimates. Colgate-Palmolive Company (NYSE:CL) also pays a decent dividend of 2.25%, which has been raised every year, and Prestige does not have a dividend.
Conclusion
Unfortunately, Prestige Brands Holdings, Inc. (NYSE:PBH) is not the great under the radar bargain I was hoping to find. However, now that the company is on my radar, it may be worth monitoring, especially during and after next week’s earnings release. Anything less than stellar numbers could cause a serious pullback, and I would become a buyer if it were closer to its historical valuation level. For now, buy Johnson & Johnson (NYSE:JNJ) or Colgate-Palmolive.
The article The Quest for a Hidden Bargain: Not Over Yet! originally appeared on Fool.com and is written by Matthew Frankel.
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