The Scent of Money

You have to say this for fragrance manufacturer Inter Parfums (Nasdaq: IPAR): It fills its investors' nostrils with the sweet scent of money. For the fourth consecutive year, the company reported an increase in sales, net income, and earnings per share. Bravo!

With fourth-quarter net sales up 33%, gross margins up five percentage points to 52%, and net income up 40%, you'd imagine the stock would be up, too. Not so fast. Inter Parfums plunged more than 10% in early morning trading.

Tainting the latest report was 2004 guidance. The company predicted gains of 15% for sales and 17% for earnings. Oh, ye unsavory slow growth! But those numbers overlook the $6 million the company is spending to increase its stake in Nichols SA to 74% from 10%. Nichols, a fast-growing player in high-end men's skin care, expects sales through March 2004 of $6 million.

And if you go sniffing around the balance sheet, you'll also see (should we say smell?) a lot to like. There you'll find $59 million in cash and cash equivalents, and no long-term debt.

True, the stock isn't cheap. One reason that Inter Parfums trades at 40 times trailing earnings is that competitors like Borghese and Coty are privately owned. Rivals Revlon (NYSE: REV) and Elizabeth Arden (Nasdaq: RDEN), meanwhile, carry lots of debt, are reporting losses, and have much broader beauty lines. (Ah, where else but in a financial column do you find "beauty" and "lines" together?)

In fact, to get quality fragrances and a quality balance sheet, you have to trade up to Estee Lauder (NYSE: EL). But slower-growth Estee goes for a healthy 33 times earnings. Accepting greater debt levels gets you to Avon Products (NYSE: AVP), but Avon has much slower sales growth and still trades at a rich 26 times earnings. Beauty simply doesn't come cheap.

OK, the market for fragrance also includes giants Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL), but no one would buy these companies for the sweet impact a fragrance product would have on the bottom line. And that brings us back to Inter Parfums, which is about as undiscovered on Wall Street as you can get -- only one analyst covers the stock.

Investors looking for a company with a beautiful balance sheet, year-after-year sales and earnings growth, improving margins, and double-digit growth for the coming year might take a look at Inter Parfums. More research is in order, but this one passes the sniff test.

Inter Parfums might be a bit rich for Tom Gardner's Motley Fool Hidden Gems, but if you like undiscovered stocks, you'll want to take a free trial.

Undiscovered Fool contributor W.D. Crotty does not own stock in any companies mentioned, but does hold a subscription to Hidden Gems.