It's been a while since I've written on Helen Of Troy (NASDAQ:HELE).
While I've long liked the company's growth-by-acquisition strategy in
the consumer goods space, I wasn't a fan of former management and that
relegated it to my "I'll never buy it, so why bother?" bucket. Better
management has been in place for about two years now, though, and I
think the company's underlying strategy is stronger.
The trouble for me, as is so often the case, is with the valuation. I
have no problem acknowledging that Helen of Troy should be valued
beyond its organic growth capacity (likely low-single digits on revenue,
mid-single digits on cash flow), as the company generates free cash
flow and rolls that into acquisitions that grow the business and
generates more cash flow (which, in turn, can be reinvested back into
acquisitions...). Likewise, it doesn't bother me that much that tangible
book value is negligible given all of the goodwill and intangibles from
the deals.
The problem is that even if I assume significant improved free cash
flow margins in the future (in the low teens), it will take around 8% to
10% annual revenue growth to support a fair value at or above $110 and
that seems ambitious. Likewise, such a fair value requires a mid-teens
forward EBITDA multiple and I just don't think that's particularly
attractive given what I expect will be high single-digit annualized
EBITDA growth over the next three to five years.
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The Tricky Case Of Helen Of Troy
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