Mid-Cap Consumer Staples: Two Ideas
That said, its always possible to find good opportunities if you look for rarely followed small capitalization enterprises. Here I want to take a quick look at two mid-capitalization stocks within the consumer staples space. One of them, Jarden (JAH), its not only cheap and high quality but the stock is also gaining momentum in the market. The other company, Elisabeth Arden (RDEN), is also cheap and high quality but -for good reasons- the market's sentiment towards the stock is poor. Let's take an look in order to decide whether it makes sense to make a bet at current market prices.
Holding Hope on the Name
Elizabeth Arden, which is held by Mario Gabelli, reported very disappointing fourth quarter results and an even more discouraging guidance for next year. Reported EPS was down by 64% year-over-year (yoy) while the company's top line growth was just 1% - well below market expectations. Arden attributed poor results mainly to three key reasons: (1) Weak sales and replenishment at a key US retailer (probably Wal-Mart). (2) Too optimistic projections for its brand repositioning (still in its early stages). Arden's management explained that the issues are largely transitional. They cited issues such as the timing of inventory replenishment, the impact of returns and exchanges and the reduction of one-third of SKUs in skincare. (3) Stiff competition in UK's fragrance market.
All the above being said, the main question remains: Are all bad news already reflected in the stock's price? Probably not yet. Arden's long term top-line growth should vary between 3% to 5% and the stock now trades at 2014 17 times earnings which does not look overly expensive for a company with some valuable brands, manageable debt (1.6 times EBITDA) and the potentiality of becoming a target for M&A. That said, I would feel comfortable at a multiple closer to 12 to 13 times earnings.
Of course, there also were some good news during the quarter. For example, the company is making good progress on its European fragrance initiative. Sales were up by 26% for both the quarter and the year. Furthermore, Arden's start-ups in Germany and Brazil are both tracking well ahead of management's expectations.
Continued Out-Performance Should Be Expected
Jarden, held by Ray Dalio, is essentially a consumer products conglomerate. The company's management has been able to accumulate and develop more than 120 powerful global brands that go from the recently acquired Yankee Candle (from Madison Dearborn Partners for $1.75 billion) to Volkl skis. The company is growing EPS at its targeted 13% yoy rate and most analysts expect 2014 gross margins to expand up to 32.5% while EBITDA margin should also expand up to 15%. Overall, Jarden is a powerful out-performer and the shares have reflected the company's operational success.
Year-to-date, Jarden's shares are up by 41%. That said, I think there is some scope for continued out-performance as the shares trade at 13 times 2014 earnings. In a few words, Jarden offers high quality and great performance at reasonable price.
Elizabeth Arden and Jarden are widely different. While Arden is the typical consumer staples company going through operational difficulties, Jarden is a diversified conglomerate within the consumer space delivering results that almost always come ahead of analyst's expectations. At current market prices, I would be long Jarden and I would wait on the side-lines in order to buy Arden if Mr. Market offers me a sensibly lower price.