helen of troy buy report
TRANSCRIPT
Helen of Troy (HELE)Buy Report
Miguel Gutierrez
I. Qualitative Profile
Helen of Troy is a company that is a seller, distributor, licenser, designer, and online
provider of consumer products. The company sells products in the United States, Canada, Latin
America, Europe, and several other countries. It is made up of four segments which are
Housewares, Healthcare & Home Environment, Nutritional Supplements, and Personal Care &
Beauty. The Housewares segment includes products used for cooking such as knives, pans, and
blenders. The Healthcare & Home Environment provides products such as humidifiers and water
filters. The Nutritional Supplements segment includes items such as skin ointments and vitamins.
Last the Personal Care segment includes products such as makeup and hair care. Helen of Troy
operates in these four segments through a portfolio of owned brands and licenses, with names
such as Honeywell, Vicks, Pur, Braun, Dr. Scholl's, BedHead, Toni & Guy, and Hydro Flask.
Helen of Troy is part of the Household Durables which is a subsector in Consumer
Discretionary, although Helen of Troy exhibits various characteristics of the Consumer Staples
segment and several of their competitors are classified under Consumer Staples. Some of their
key competitors that we used to analyze Helen of Troy were Procter and Gamble, Jarden
Corporation, Spectrum, Kimberly-Clark, Unilever, and Usana. What differentiates Helen of Troy
from its competitors is that the company currently trades at a P/E (price to earnings) ratio of
22.6x which is lower relative to its competitors Procter and Gamble, Jarden Corp, Kimberly
Clark, and Spectrum with each at 25.6x, 77.5x, 48.6x, and 34.4x respectively. Along with this
and other metrics, we see Helen of Troy as a value company. Second, the company is a small
player in the Consumer Durables segment, but has had stronger growth in the recent past
organically and through acquisitions. Third, through its acquisitions and licensing agreements
Helen has begun to gather a strong portfolio of well known and low elasticity brands which are
trusted by consumers and purchased frequently. Fourth, the company is able to maintain its
flexibility by partnering with well established brands that offer possibilities for product
innovation and design. If these partnerships are not longer beneficial though, the company can
terminate them and seek out new partnerships.
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As seen from the graph above, where gray represents levered free cash flow, orange
represents gross profit, and blue represents total revenues. Helen of Troy has had strong
performance over the past 5 years, but is not followed as strongly by analysts because bigger
names such as Procter and Gamble and Unilever tend to overshadow it. Nevertheless the
company has been growing in all four of its segments. Total revenue has increased on a 5 year
CAGR of 17.31% compared to the competitors’ average of 5.29% The same holds true for gross
profit which was 15.28% on a CAGR basis. In addition, the company has had the lowest amount
of leverage at 49% relative to its competitors, which means the company can stay lean with its
levered free cash flow as it has in the past 5 years.
The company currently does not offer dividends, but we view this is as an opportunity for
it to continue to invest in positive NPV projects which will continue to fuel its growth. In
addition, the company is strongly positioned to grow due to low leverage, strong cash flow
percentage, and low cost of goods sold, which will be explained in detail later.
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The latest acquisitions for Helen have been the purchases of Steel Technology, Vicks
Vaposteam, Pur Water, and OXO International. Through its tactical acquisitions the company
has grown their segment revenues and gained a widely known portfolio of brands with low
elasticity.
The Steel Technology acquisition, which owns a company called Hydro Flask, will allow Helen
of Troy to enter the growing $270 billion segment of athletic leisure. Hydro Flask is the second
largest provider of hydration vessels, the company is expected to have sales revenue in 2016 of
$65-$70 million, also the acquisition is expected to have an effect immediately on Helen’s
EBITDA. Hydro Flask has grown in revenues since 2014 by about 4x, with the largest amount of
growth happening in 2015 by about 50%, and the company also leads the growth in the hydration
vessels/bottles category.
Another recent acquisition was that of Vicks VapoSteam from Procter and Gamble.
Vicks VapoSteam is the leading company in the inhalant category of Consumer Durables. Vicks
recently combined their devices and consumables segments which now enables them to invest in
additional product development and marketing. The Vicks VapoSteam Line as of 2014 generated
revenue of $10 million per year which will add to an increase in revenue and profitability for
Helen of Troy. In addition, the acquisition of Vicks will further enhance Helen’s already strong
portfolio of well trusted brands.
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In terms of segment revenue, both the Housewares and Health & Home segments have
had continued revenue growth on average by 7.65 % and 6.75% respectively. Some tailwinds
for this have been low interest rates, low unemployment rates, and the overall U.S economy
continuing on its bullish trend. All these have allowed a greater amount of people to purchase
homes and the products that go inside of these homes. The health segment has also seen revenue
growth as more people are purchasing wellness related products due to a growing trend in higher
health conscientiousness.
Finally, Helen of Troy has gained stronger management by recently appointing Julien
Mininberg as CEO in 2014. Prior to this, Mininberg had been the CEO for Kaz, which is a
wholly owned subsidiary of Helen and is part of the Health and Home Care segment. Before that
he worked for Procter and Gamble for 15 years where he lead management and marketing in
brands such as Vicks, Pepto Bismol, and Metamucil. Mininberg also managed the cleaning
products division in Latin America and Central America. We see a strong foundation in terms of
the experience and brands that Mininberg has been exposed to, and we see him being able to
apply the knowledge and experience to help Helen of Troy grow further. An example of his
future vision for the company was in the recent acquisition of Healthy Directions which will
offer a deeper breath of health related products and meet growing demands of the health sector.
This acquisition will add to sustained growth and create extra value for shareholders.
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2. Competitive Analysis
The market environment for consumer-product companies is highly competitive due to
global, regional, and local competitors offering a variety of similar products. Because of this,
switching costs are low for consumers who have easy accessibility to choose products based on
either value of brand or on cost of lower priced alternatives. Helen of Troy’s strategy is to
continue to be innovative and acquire well recognized brands that will add to its sustainable
competitive advantage.
Helen does not face a high degree of threats from entrants, because research and
development costs associated with entering this market are quite high. If a competitor does enter
the market successfully, then it must compete with other well recognized brands in order to attain
shelf space in local drugstores, supermarkets, etc. Overall the threat of entry is quite low.
In terms of buyer power there are two perspectives; one is that large buyers like Walmart
and Target that have strong buyer power, because they are nationally and globally recognized
and can set price limits and limits of placement of products in their stores. The other perspective
is in terms of consumer buyer power which is relatively strong, because individuals can purchase
from other competitors, such as Procter and Gamble or Kimberly Klark. A strategy could be for
Helen of Troy to offer more of its brands online in order to maintain its competitive advantage,
which it has begun to do with acquisition of Healthy Directions.
In regards to weaknesses, Helen of Troy is vulnerable to currency headwinds due to its
global operations, especially with the increasing strength of the US dollar. In the recent quarters,
Helen has seen a decline in the beauty segment. This was partially due to foreign currency
fluctuations reducing its sales revenue by around 2.6% as well as to competitive pressures and
lost of distribution at retail stores. It also is vulnerable to impairment of goodwill in their
trademarks as the company is required to to perform an annual review of impairment, such as in
2009 when the company had a loss on their income statement mainly due to a $102 million
dollar impairment in the personal products segment.
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II. Focused Financials & Valuation Comparable
There we several key metrics that we looked at when comparing Helen of Troy to its
competitors. Some were specific to the Consumer Durables and other were general valuation
metrics.
The company valuation metrics we focused on were price to earnings, debt to equity and
free cash flow to sales. Helen had the second lowest price to earnings compared to its
competitors at 22.6x. This means that the company is trading at about 22 times earnings, and we
see this as a strong sign of undervaluation given the amount of growth that the company has had
in the past five years and relative to the competitor average of 35.5x.. The next metric we
focused on was free cash flow to sales. We saw this as a crucial measurement for a company that
is seeking to grow and gain market share relative to its competitors. Currently, Helen has the
third highest free cash flow to sales at 11.91%, this means that the company is creating about
$0.12 cents of free cash flow per every dollar of sales. This is relatively higher compared to its
main competitors, which means the company has the tools to continue its growth. Last, the most
important metric that we found was their debt to equity, currently Helen holds the lowest at 49%,
compared to the industry average at 655%. We again emphasize this as a key tool for the
company to continue its growth because they are able to maintain flexibility and can fund
through debt if necessary. In our average for the debt to equity, we did not include Kimberly
Clark’s of 19,597% because we saw this as an outlier.
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In terms of industry specific metrics for Consumer Durables, the first one we looked was
cost of goods sold; here the company has the third lowest metric relative to its competitors. This
is very important, because normally smaller market cap companies are expected to have higher
costs when compared to their larger counterparts. In the case of Helen though, it is able to pay
$0.58 cents per dollar of revenue to acquire their goods when compared to that of giant Procter
and Gamble at $0.68 cents per dollar of revenue.
Another measure we looked at was the company’s quick ratio at 1.06. This means that the
company is able to cover their current liabilities 1.06 times over. This is important for a company
in the Consumer Durables sector that wants to stay flexible, as well as be able to cover its
liabilities such as payables to suppliers. When compared to Procter and Gamble's at 0.55x and
Unilever at 0.63x, Helen has a greater ability to cover its current liabilities. Last, we want to
reiterate again their low debt to equity at 49%. We see this as a very strong measure, because it
gives the company greater flexibility.
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We also analyzed the company’s compounded annual growth rate over the past five
years. In terms of total revenues, Helen has the highest growth rate of 17.31% which is well
above the average of 5.29%, this was due to the fact that is has strong strategic acquisitions and
partnerships along with offering a breath of trusted brands. Consumers are also purchasing more
especially as the economy has grown since the 2008 crisis.
Also the company’s gross profit has increased on a 5 year CAGR average basis at
15.28%, meaning that as the company has grown they have been able to lower their cost of
goods sold at a higher pace compared to the competitors average and Proctor and Gamble's
negative growth in this of (1.74%). In gross profit growth the company has the highest amount
relative to all the competitors. As previously mentioned this is very important for a company that
competes with Consumer Durables giants whom benefit from economies of scope. Last, the
company has grown in terms of levered free cash flows on a 5 year basis by 20.54%, which is the
second highest growth rate compared to its competitors.
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We compared Helen of Troy over the past three years to the S&P 500 index and the S&P
500 Consumer Durables index. Helen had a total return of 181.02%, and outperformed the S&P
500 index by 142.52%, as well as the S&P 500 Consumer Durables sector by 140%.
These returns line up with Helen's low beta of 0.83, which shows that the company is not
as heavily affected by market volatility relative to the whole consumer discretionary sector
(index XLY) with a beta of 1.03, so we expect to see consistently strong returns as it has done in
the past.
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III. Formal Valuation (Discounted Cash Flow)
In our analysis of the Discounted Cash Flow we made adjustments to Helen of Troy's
perpetuity growth rate, EV/EBITDA multiple, revenue streams, and capital expenditures.
Initially our Exit EV/EBITDA had a multiple of 16.4x. We wanted to use something more
conservative since the model was accounting for their latest acquisition of Hydro Flask which
increased EBITDA. When we referenced the company’s historical patterns in regards to its
acquisitions and non-acquisition periods, we came up with a more conservative multiple of 12x,
which was an average of what we expected for the company.
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For the Perpetuity Growth Method model, we adjusted the perpetuity growth rate set at
2% to a slightly more conservative rate of 1.9%. Even though the rate we chose was high relative
to its competitors, we believe this to be the case for Helen based on growth metrics we
mentioned earlier. Also, the model forecasted yearly revenue increases of 3%, but we increased
its revenues to match the years of high capital expenditures/acquisitions and decreased it for the
nears of no acquisition activity. In the past Helen had an average increase in revenue of 27% on
years of acquisition, so we chose a more conservative increase of 12%, and in the years with no
acquisitions we chose 5% revenue increases. Our assumptions for both of these were based on
historical rates. We also increased the capital expenditures by less than 1% per year, since we
expect the company to continue with strong acquisitions. In doing this we did not adjust
depreciation since we believe the estimates that the model used were accurate given their 3%
increase in the past couple of years and saw the 2% default as a conservative measure.
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Our results for the EBITDA Multiple method showed an estimated value per share of $114 with
a 12% upside, and for the Perpetuity Growth Method we had an estimated value per share of
$109.58 with an upside of 7%. We see this as another strong reason the company is undervalued,
given its price as of March 29, 2016 at $103.01.
V. Conclusion
In conclusion, we know Helen of Troy will be a solid company to add to the Ann Rife
Portfolio because of both its quantitative and qualitative factors. Helen’s valuation metrics prove
the company is undervalued when compared to their competitors. It has both outperformed the
S&P 500 and S&P 500 Consumer Durables. From the financial analysis Helen is relatively
undervalued and we expect their 12 month target price to be $109. They are also a defensive play
in the largely volatile Consumer Discretionary sector which was more affected in the first quarter
of 2016. Helen also offers a strong portfolio of well recognized brands that consumers continue
to trust and purchase. Finally it has had strong growth both organically and through acquisitions,
thus we see it continuing to gain market share and becoming a strong player for the consumer
products segment.
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Resources
Capital IQ:
(n.d.). In S&P Capital IQ . Retrieved March 29, 2016, from S&P Capital IQ.
Net Advantage:
(n.d.). In Net Advantage. Retrieved March 29, 2016, from S&P Capital IQ Net Advantage.
Bloomberg Database:
(n.d.). In Bloomberg. Retrieved March 29, 2016, from Bloomberg Database.
Yahoo Finance:
(n.d.). In Yahoo Finance . Retrieved March 29, 2016, from http://finance.yahoo.com/q?s=HELE
Business Wire:
(2016, February 26). In Helen of Troy Announces Agreement to Acquire Hydro Flask® .
Retrieved March 29, 2016, from
http://www.businesswire.com/news/home/20160229005806/en/Helen-Troy-Announces-
Agreement-Acquire-Hydro-Flask®
The Street Insider:
(2014, September 2). In Helen Of Troy Ltd (HELE) Warns for FY 2015. Retrieved March 29,
2016, from http://www.streetinsider.com/Guidance/Helen+Of+Troy+Ltd+%28HELE
%29+Warns+for+FY+2015/9799039.html
Vapo Stream:
Beckerman, J. (2014, September 2). In Procter & Gamble Sells Vicks VapoStream U.S. Business
to Helen of Troy. Retrieved March 31, 2016, from http://www.wsj.com/articles/procter-gamble-
sells-vicks-vapostream-u-s-business-to-helen-of-troy-1427842613
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Wilkes, D. (2015, April 2). Helen of Troy acquires Vicks VapoSteam in US. In OTC Tool Box.
Retrieved March 31, 2016, from http://www.otctoolbox.com/news/helen-of-troy-acquires-vicks-
vaposteam-in-us.aspx
Wiki Invest:
Dunnigan, S., Sassorossi, T., & Staley, K. (n.d.). In Wiki Invest. Retrieved March 31, 2016, from
http://www.wikinvest.com/stock/Helen_of_Troy_%28HELE%29
Market Watch:
10-Q: HELEN OF TROY LTD (2016, January 11). In Market Watch. Retrieved March 31, 2016,
from http://www.marketwatch.com/story/10-q-helen-of-troy-ltd-2016-01-11
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