Household & Personal Products
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HNST $15
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Jessica Alba's Honest Company is open for trading, but can it compete with the likes of Procter & Gamble and Kimberly-Clark?
(11 May 2021) Hollywood star Jessica Alba was plagued by asthma and allergies as a child to the point of being hospitalized on several occasions due to her maladies. Those experiences helped shape her thoughts on personal health, ultimately leading to her decision to launch The Honest Company (HNST $15) a decade ago. The Honest Company is a consumer products firm which offers a growing line of eco-friendly baby supplies (primarily diapers), bath and skincare products, and home cleaning solutions. There are over 2,500 chemicals and materials the company excludes from its products due to their potentially harmful effects on either the body or the environment. How has Alba's concept resonated with consumers? Overall, pretty well. The company's products are now available at 32,000 various retailers throughout the US and Canada, including big players like Target (TGT) and Walgreens Boots Alliance (WBA). While still operating in the red, the company's revenues rose from $235M in 2019 to $300M in 2020 (+28%) and losses were stanched from -$31M to -$14M (a 55% improvement) over the same time frame. Leading into Wednesday's IPO, HNST shares were priced in the $14 to $17 range. They shot out of the gate at $23 per share and have fallen precipitously ever since. The company's valuation now sits at $1.4 billion, but is it worth even that much? There is a mountain of competition in this space—both the personal care products industry in general and the eco-friendly corner specifically. Having Jessica Alba's sway certainly helps, but facing down the market caps of Procter ($330B), Unilever PLC ($155B), Kimberly-Clark ($46B), and an army of "green" players will be a herculean task. Furthermore, the aforementioned stocks all come with nice dividend yields, while HNST will need to plow its capital back into its strategic growth efforts. Nonetheless, we do see a faithful and growing customer base. Honest estimates it currently holds about 5% market share in its space, and 55% of revenues are generated online. We believe it could easily double its market share in the short term, generating in excess of $500 million in revenues by 2023; maybe even becoming profitable by that point. The company is worth keeping an eye on, and the products are also worth a look. HNST shares have now lost about one-third of their value since IPO day. If they drop to the $10/share range, we believe they will be undervalued and worth looking at for a potential purchase. |
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CSPR
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Casper soars out of the gate, then floats back down to earth on first trading day. (06 Feb 2020) It is pretty remarkable what has happened to the tired old mattress industry over the past five years or so, but to say it has been reinvigorated by a number of new entrants would be an understatement. From Purple to Leesa to Sleep Number to Casper, Americans suddenly have a lot of homework to do before plopping down big bucks on a new mattress. The last company mentioned, Casper (CSPR $14), just made its debut as a publicly-traded company this week, but scorched IPO investors seemed to tread lightly after the likes of SmileDirectClub (SDC), Lyft (LYFT), and the mission-aborted WeWork debacle. Initially priced in the $17-$18 range, the underwriters ended up offering 8.35 million shares of the mattress and bedding supplies company at $12. Out of the gate, that appeared to be a smart strategy, as shares were up 30% within a matter of minutes. As the day wore on, however, doubts seemed to creep back in and the stock finished its first trading day at $13.60. While it faces stiff competition, Casper was one of the first "new breed" mattress companies to come along, launching in 2014. Additionally, Target (TGT) has invested $80 million in the firm. Counter that, however, with reports that the giant retailer was prepared to plop down $1 billion to buy the firm outright back in 2017. They dodged a bullet on that one, as Casper's current valuation isn't close to that figure. In addition to its main direct-to-consumer online presence, Casper products are also available from retailers such as Target (obviously), Costco, and Amazon. The best news for the firm, probably, is the fact that they didn't come close to getting the IPO price they wanted. That would have made the downward trajectory look a lot worse. Maybe something good actually came out of the Class of 2019's worst unicorns. Of all the new mattress firms, Casper is probably the strongest. That being said, there is virtually no barrier to entry, so expect the competitive landscape to only become more bloody. We wouldn't touch the shares.
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COTY
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Global beauty brand Coty buys 51% of Kylie Cosmetics for $600 million. (18 Nov 2019) Back on 19 August, when shares of $9 billion cosmetics firm Coty (COTY $6-$12-$14) were trading at $9.19, we said they were worth a serious look. Even though the shares have rallied 33% in the 90 days since, we still believe they have room to run. Those shares got a little bump on Monday as the company announced it would buy a 51% stake in Kylie Jenner's beauty line, Kylie Cosmetics, for $600 million. The deal represents part of a larger strategy by the company to garner a greater market share among a younger clientele. The cosmetics firm will take over responsibility for the product lineup, while the 22-year-old billionaire Jenner will remain the face of the company. Coty is majority owned by JAB Holdings Corp, owner of Keurig, Panera, Krispy Kreme, and a number of other companies we used to have the luxury of trading (before being gobbled up and taken private). Coty is following a recent trend set by other industry players such as The Estee Lauder Companies (EL) and Revlon (REV), which have been on a buying spree as of late. Estee Lauder, for example, just bought the two-thirds of South Korea's "Have & Be Company" which it didn't already own, establishing its first foothold in the lucrative Asian market. While more of a retailer than a maker of products, we believe the most undervalued player in the space is Ulta Beauty (ULTA $224-$244-$369), which is trading relatively near its 52-week low.
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ULTA
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Ulta Beauty suffers nightmare day in the market, shares plunge 30%. (03 Sep 2019) For the better part of a decade, investors have priced beauty retailer Ulta (ULTA $224-$237-$369) more like an upscale luxury brand than a personal products company. All of that changed following the company's Q2 earnings report, which spurred a one-day, 30% selloff in the shares. The numbers themselves weren't exactly disastrous: revenues rose 12% year-over-year, to $1.67 billion, while earnings rose 8.8% from the same period last year. The trouble came in the form of a statement released by CEO Mary Dillon which accompanied the earnings report. Dillon cited industry-wide headwinds as the major reason management had to downgrade full-year growth expectations. As for the valuation of ULTA shares, they have quickly dropped to a P/E ratio of 20, well below the specialty retail industry average of 38.27. We discuss Ulta in further detail in the next issue of The Penn Wealth Report. Members can get a look at our fair value for the company by logging in at the Trading Desk.
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EL
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Estee Lauder shares soar on—wait for it—strong sales in Asia. (19 Aug 2019) Apparently management at The Estee Lauder Companies (EL $121-$202-$195) didn't get the memo: blame slowing revenues and thin profits on weak Asian sales due to the trade dispute. Not only did the cosmetics powerhouse grow its revenues by 9% over last year, to $3.59 billion in the fiscal fourth quarter, they did so on the back of an 18% spike in Asia-Pacific net sales. These numbers, coupled with management's rosy projection for 9-10% net sales growth in fiscal Q1 of 2020, helped drive shares of the company up over 12% on the day, punching through their old 52-week high of $195. In addition to its name brand products, EL's portfolio includes such brands as Clinique, Origins, Bobbi Brown, and Aveda. With the global slowdown, we have been told to stick to North American-centric businesses; considering Estee Lauder's North American sales account for just over one-third of the company's revenues, that advice was turned on its head. CEO Fabrizio Freda continues to shine, one decade after he took the helm at the $73 billion firm. A well-run company in the toiletries and cosmetics industry can serve as a nice defensive play in a downturn, as consumers tend to stick with their favorite beauty brands no matter the state of the economy. Peers worth looking at include Coty (COTY), Helen of Troy (HELE), and e.l.f. Beauty (ELF).
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ELF
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Is e.l.f Beauty on the Fed's radar screen after North Korean eyelash incident? (08 Feb 2019) The sky was the limit back in October of 2016 when e.l.f. Beauty (ELF $8-$9-$22) became only the third beauty products company in a decade to go public. A lot has changed since the company's halcyon first quarter; in fact, ELF's share price is now down 70% since the end of 2016. There was a lot of excitement around the company at the time of its IPO, and we fielded questions from clients interested in taking an early position in the stock. Our recommendation? Stick with tried and true names like Ulta Beauty (ULTA) and Estee Lauder (EL). That turned out to be good advice, but what was the reason for ELF's most-recent market tumble? False eyelashes and North Korea. The Oakland-based firm just agreed to pay $1 million in fines after the US Office of Foreign Assets Control—a division of Treasury—accused them of importing 156 shipments of the false eyelash kits from China, but with materials emanating from North Korea. The cosmetics firm said an internal audit did uncover the source of the materials after the fact, a statement the OFAC confirmed, but this probably makes the $450 million company susceptible to closer scrutiny going forward. ELF had a market cap of $1.4 billion a few months after going public. How have the beauty companies performed since e.l.f. went public? The clear winner is The Estee Lauder Companies, up 75% while the competitors have been languishing. EL also has the biggest gross profit margin of the group, at 77%.
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NWL
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Newell Rubbermaid spiked pre-market on news that Icahn was taking a stake
(01 Mar 2018) Food storage product maker Newell Brands (NWL $24-$26-$55), maker of the iconic Rubbermaid product line, has been floundering as of late—sitting about 50% off of its 52-week high share price. Shares of the company got a 7% pop pre-market after reports that Carl Icahn had acquired a leading equity stake. With its paltry 9.92 p/e and consistent positive cash flow, this boring old company might just be a winner as we progress deeper into this volatile year. The 3.58% dividend yield doesn't hurt, either. |
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CL
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Colgate falls 6% following an unexpectedly weak earnings report
(26 Jan 2018) Up until now, Colgate-Palmolive (CL $63-$73-$78) had seemed to be weathering the competitive state of the consumer goods market pretty well. After all, how many people would trust putting toothpaste made in China into their mouth, or give Chinese dog food to their beloved pets? (Colgate owns Hill's Science Diet.) The $65 billion company stumbled in the fourth quarter, however, reporting lower-than-expected sales and a drop in net income. Does the share price hit present investors with a nice buying opportunity? Not really. With a 30 P/E (Procter & Gamble's is 23 and Kimberly-Clark's is 19), a 2% dividend yield, and higher raw material costs due to increasing commodity prices, we put the company's fair value around $72 per share—a buck cheaper than where it is trading after the plunge. |
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PG
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Good guys win one: Activist Peltz loses his battle against Procter & Gamble
(10 Oct 2017) Billionaire activist agitator Nelson Peltz's Trian Partners just lost its massive battle against $235 billion household products titan Procter & Gamble (PG $81-$91-$95). The bully Peltz, who "doesn't know how to spell the word lose," demanded a seat on the board and major corporate changes. Shareholders didn't agree, with the majority of shareholders voting with the company. Within seconds, the financial press reported that PG shares were "plummeting" on the results. They were down 2% right after the vote, and steadily climbed back. Why would the media so willingly hack away at their own credibility, which is already at an all-time low? As for Procter, management really went after Peltz and Trian, which was incredibly refreshing in this day of timid and malleable corporate governance. (18 Nov 2017 Update) Never mind. Peltz won in the recount. |
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KHC
UL |
(17 Feb 2017) Kraft launches $143 billion takeover bid for UK's Unilever, which is quickly rejected. American food giant Kraft Heinz (KHC $72-$94-$91) jumped 9% Friday morning on reports that it has made an unsolicited, $143 billion bid to buy the UK's household products giant Unilever (UL $39-$46-$49), which also jumped 9% on the news. Unilever quickly rejected the bid, but did so on the grounds that it grossly undervalues the Anglo-Dutch firm, which makes such diverse products as Dove Soap and Breyer's Ice Cream. In other words, the rejection appears to more of a "bring us a better offer" than a total rebuff. Under British law, KHC now has until 17 March to come back with a firm offer or walk away. (Side note: Warren Buffett and the Brazilian-owned firm he backs, 3G, actually owns 51% of KHC, giving the company incredible buying power.)
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PG
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(14 Feb 2017) Trian makes activist move on Procter & Gamble. Nelson Peltz's Trian Fund Management has its sights set on household goods giant Procter & Gamble (PG $79-$91-$90), and the company is putting $3.5 billion where its mouth is. Granted, for a $233 billion behemoth, $3.5B might not sound like much, but the infusion (and ensuing excitement) was enough to make it hit a new 52-week high today. The management firm wants P&G to aggressively shed money-losing units and focus on its core products like Tide, Gillette razors, Charmin bathroom tissue, and Pampers disposable diapers.
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UL
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(21 Jul 2016) Unilever to buy Dollar Shave Club. UK-based Unilever PLC (UL) has agreed to buy privately-held Dollar Shave Club for $1 billion. The Venice, California-based startup has taken the shaving industry by storm, offering a low-cost monthly subscription plan for men's razors. Unilever is going on the offense against shaving giant Gillette, owned by P&G, which controls about 65% of the worldwide market share for blades.
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