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Bull of the Day: Prestige Brands Holdings Inc: (PBH)

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Consumer staple stocks don’t have to fall in the “defensive only” category, nor do they have to offer sub-par performance in a booming stock market.  This is especially true if they are strong, growing brands under good management. 

One company that fits this description and stands out among their peers is Prestige Brands, Inc (PBH - Free Report) . Prestige markets, sells and distributes over-the-counter healthcare, household cleaning products and personal care products to retail outlets in the US, Canada, and certain international markets.

Their recognizable brands can be found around your home and medicine cabinet, they include everything from Luden’s cough drops and Tagamet to Comet cleaner, Cloreseptic, Clear Eyes drops and more. 

Most people wouldn’t expect a 100% annual return from a staple stock like PBH, but that’s exactly what shares have done since I last mentioned them on February 16th, 2012 as a momentum stock.

Consistent, Strong Earnings Trends
One year ago, Prestige Brands was a small-cap ($681 million) company trading at about 15.6 times trailing earnings (P/E) or roughly $12 per share.

After four earnings beats at an average of 16.37% over Zacks Consensus Estimates, shares are now at $24 and trading at about 16 times forward earnings (still not terribly expensive).  Their market cap has obviously doubled in that time.

On February 7th, Prestige earnings beat the Zacks Consensus by almost 9%.  The company reported adjusted Q3 EPS of 37 cents, up 48% from a year ago.

Revenue climbed 51% to $160.2 million, beating views. It cited strength across its line of over-the-counter medicines and household cleaners.

Prestige now expects full-year EPS of $1.45 to $1.48, vs. previous analyst forecasts for $1.43. That implies Q4 EPS of 31-34 cents versus the 29-31 cent prior consensus. These strong estimates equal a positive ESP for the coming quarter which when combined with a Zacks Rank 1 or 2 gives PBH a high probability of beating estimates and moving higher in the current quarter.

Brand Strength
Q3 Revenues for PBH’s over the counter healthcare (OTC) segment were $139.0 million, 63.7% higher than the prior year's third quarter results of $84.9 million. The increase in revenues in the OTC segment was a result of the increased marketing and advertising support behind the Company's core OTC brands.

Revenues for the Household Cleaning segment, which represents approximately 13% of corporate revenues and 7% of brand contribution, were $21.2 million in Q3, approximately even same quarter results from a year ago.

Year-to-date revenues for the Household Cleaning segment were $65.9 million, an 8.2% decrease over the prior year comparable nine month period's results of $71.8 million.  I guess people are medicating more and cleaning less…

Increase in cash flow, decrease in debt
For the nine month period ended December 31, 2012, free cash flow totaled $92.0 million compared to $47.6 million in the prior year's comparable period; a 93% increase.

The Company's net debt at December 31, 2012 was $997.1 million, down $63.9 million during the quarter. This consisted of approximately $42 million of cash flow from operations and approximately $22 million of proceeds realized from the previously announced divestiture of Phazyme gas treatment.

Looking Forward
Aside from the positive outlook from the executive team, I think there is something to be said about their brand positioning and sector.

At 16 times forward earnings, PBH can no longer be considered a “value” stock, but given their growth record and high demand for their products in a flat economic climate there is potential for the stock to move higher.

From a fundamental standpoint PBH has a unique angle in the growing OTC market.  Over time, often 3–6 years, drugs that prove themselves safe and appropriate as prescription medicines may be switched from prescription to OTC. At that point they can be branded and sold by companies like Prestige.

Given the current state of healthcare and the ongoing reforms, you can expect an increase of folks moving towards lower cost OTC remedies like those offered by Prestige.  There is no doubt competition from the store-brand OTC remedies and cleaning products, but with steady marketing and a healthy economy, the best and most popular brands should continue to attract consumers.

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