Chattem's (Nasdaq: CHTT ) stock has been on a tear of late -- more than doubling since its low last July. Yesterday, it continued the good news by reporting a whopping 42% increase in revenue. Unfortunately, the future of the company looks more lukewarm than hot.
The sales increase was due almost entirely to the five brands the company acquired from Johnson & Johnson (NYSE: JNJ ) in January. Excluding those brands, sales of existing brands rose a paltry 3%-4%. Many of Chattem's existing brands actually saw decent increases, like the medicated powder and Bullfrog sunblock lines, which increased 25% and 28% respectively for the first half of the year compared to 2006. But sales of the existing brands were dragged down by Icy Hot Pro-Therapy, which hasn't been able to gain traction since its launch and was down 83% for the first six months of 2007 compared to last year. Decrease in sales of the Sunsource line also dragged down sales, mainly because of decreased demand for its garlic products, including Garlique.
Gross margins held steady at 68%, so there's no stellar money-maker in the newly acquired brands. The company was able to use the increased sales from the new brands to decrease the impact of selling, general, and administrative expenses. SG&A expenses decreased from 14.5% of total revenue in the second quarter of last year to 12.7% this quarter. It's nice to see that the acquisition hasn't induced bloat in the front office.
The $425 million debt load Chattem took on to finance the acquisition of the J&J brands added an additional $5.9 million in interest expenses for the second quarter. However, the increased sales from the integration of the new brands clearly made up for the increased expense. In fact, the extra revenue allowed the company to extinguish $35 million of its debt since the acquisition.
Given the strong sales, the company raised the low end of its earnings estimate from $2.94 to $3 per share, but it kept the high end of the estimate at $3.19. At the current price, those earnings would give the company a P/E of 19-21 at the end of the year. While Chattem has certainly grown quickly over the past year, it will be hard for the company to keep up the stellar growth. In my opinion, it probably doesn't deserve a multiple much higher than 20, so there's little upside potential for the stock at this price. Investors would probably be better served by looking at companies with a lower multiple, such as Procter & Gamble (NYSE: PG ) .