While different industries have seen fortunes rise and fall in the pandemic, one remains unchanged
While the At-Home Revolution ended up disrupting multiple industries, some exist outside of the ‘At-Home’ dynamic entirely. Today’s company exists in an industry with a steady return, whether or not people spend more time at home.
That being said, credit rating agencies are still skittish when viewing this firm’s credit health, which may be overly pessimistic.
Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.
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Although many companies across numerous industries benefitted or were disrupted during the pandemic, there is one industry totally unaffected by the seismic shift in the economy.
Consumer product companies have little change throughout the pandemic and the At-Home Revolution. Demand for this industry’s services are highly inflexible, and demand tracks close to population changes.
When consumer product companies are mentioned, individuals often think of the stalwart examples such as Procter & Gamble (PG) or Clorox (CLX).
That being said, there are plenty of smaller companies who also supply essentials items consumers will continue needing for years to come.
One of the more prominent smaller firms is Prestige Brands (PBH). The company makes items such as Clear Eyes eye drops, Luden’s cough drops, and Chloraseptic.
Even though these brands may not be as recognizable or prestigious as brands like Colgate, the company has strong returns. Specifically, the company currently has Uniform return on asset (ROA) levels of 45%.
Despite offering valuable and durable products, coupled with resilient cash flows throughout the At-Home Revolution, rating agencies such as believe it to be an imminent default risk.
Specifically, the major rating agencies are still skittish when rating Prestige Consumer Healthcare’s debt. Specifically, Moody’s gives it a highly speculative high yield B2 rating, with the implied assumption of a 25%+ risk of default over the next five years.
Our Credit Cash Flow Prime (CCFP) analysis is able to get to the heart of the firm’s true credit risk.
In the below chart, the stacked bars represent the firm’s obligations each year for the next five years. These obligations are then compared to the firm’s cash flow (blue line) as well as the cash on hand at the beginning of each period (blue dots) and available cash and undrawn revolver (blue triangles).
As depicted, Prestige Consumer Healthcare exceeds all operating obligations, and covers debt maturities every year except 2023, where the firm faces a significant debt headwall. That being said, the firm has an ample runway of time to refinance its debt due 2024. Additionally, considering the company’s strong cash flows and robust Uniform ROA levels, the debt maturing in 2024 should pose minimal risk to the firm.
Rather than a name in distress, Prestige Consumer Healthcare has less credit risk than a high yield rating would imply. This is why Moody’s B2 highly speculative rating, with a 25%+ risk of default expectation does not make sense.
Using the CCFP analysis, Valens rates Prestige Consumer Healthcare as a safer crossover XO- (equivalent to a Ba1). This rating corresponds with a default rate below 10% within the next five years, a more realistic projection once a holistic understanding of the company’s risk is taken into account.
Ultimately, Uniform Accounting and the Credit Cash Flow Prime analysis highlights how Prestige Consumer Healthcare’s credit risk profile is much safer than what rating agencies are portraying it to be.
SUMMARY and Prestige Consumer Healthcare Inc. Tearsheet
As the Uniform Accounting tearsheet for Prestige Consumer Healthcare Inc. (PBH:USA) highlights, the Uniform P/E trades at 14.6x, which is below the global corporate average valuation levels, but around its historical average valuations.
Low P/Es require low EPS growth to sustain them. That said, in the case of Prestige Consumer Healthcare, the company has recently shown a 20% Uniform EPS decline.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Prestige Consumer Healthcare’s Wall Street analyst-driven forecast is a 13% and 4% EPS growth in 2021 and 2022, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Prestige Consumer Healthcare’s $41.33 stock price. These are often referred to as market embedded expectations.
Prestige Consumer Healthcare is currently being valued as if Uniform earnings were to grow by 18% annually over the next three years. What Wall Street analysts expect for Prestige’s earnings growth is below what the current stock market valuation requires in 2021 and 2022.
Furthermore, the company’s earning power is 8x the corporate average. However, cash flows are below its total obligations—including debt maturities, capex maintenance, and dividends. In addition, intrinsic credit risk is 460bps above the risk-free rate. Together, this signals a moderate operating and credit risk.
To conclude, Prestige’s Uniform earnings growth is above peer averages and the company is trading above average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research