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Is it Time to Sell Helen of Troy Near All-Time Highs?

By Ryan Downie - Oct 30, 2019 at 11:24AM

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An aggressive valuation of this consumer staples company suggests it’s time to realize unsustainable gains

Helen of Troy (HELE -0.52%) is a large-cap producer of household, kitchen, personal care, and beauty products. Shares are up 4.2% since the company reported earnings on Oct. 8. When a multi-billion dollar consumer staples company with a global footprint surges or falls that much in such a short period, it is valid to question the valuation either before or after the surge because fundamentals for a company of this scale are not that volatile.

The most recent quarter exceeded revenue and earnings forecasts, and management raised guidance for the remainder of the year -- so, it could be the case that shares were discounted previously, and the new price more accurately reflects the company's fundamentals.

Helen of Troy shares are approaching the all-time high were achieved last month, bouncing back from a brief slide leading up to earnings. Since the lowest point of the 2009 market downturn in March of that year, Helen of Troy shares have appreciated 1,046%, far exceeding the S&P's 277% growth and the 209% return provided by iShares U.S. Consumer Goods ETF.

An array of kitchen utensils including a knife, whisk, and spatula on a blue background

Image Source: Getty Images

Do its fundamentals support the valuation?

This stellar stock performance has been delivered despite modest top-line expansion. The company's average annual revenue growth rate has ranged between 3.5% and 4% in recent years, but Helen of Troy's net earnings have been growing closer to 20% thanks to margin expansion.

Helen of Troy's operating metrics are not spectacular when compared to other large consumer packaged goods companies. Operating and net margins are healthy, but still trail industry averages by approximately 200 basis points. Returns on assets, equity, and invested capital are all similarly slightly below the peer group average.

The company's shares trade at a substantial premium to comparable stocks on the basis of 18.95 EV/EBITDA, 18.7 forward price-to-earnings, and 2.34 PEG ratio. Price-to-free cash flow is roughly equal to the industry average at 23.2. The company does not pay a cash dividend, while its major peers pay an average yield of 2.7%. Growth expectations are positive, but still only in the mid-single-digits.

Better buys in the sector

Helen of Troy is delivering strong performance, and the company's offering is likely to remain relatively stable demand during a recession. While I struggle to identify any problem with company management or fundamentals, I do not believe the investment narrative supports this valuation. There are less expensive stocks that provide similar macroeconomic exposure, especially ones that will pay a dividend during market downturns, such as Procter & Gamble (PG -0.38%) or Kimberly Clark (KMB -0.42%). Investors seeking exposure to the recession-proof consumer staples sector would do better to shop around.

Ryan Patrick has no position in any of the stocks mentioned. The Motley Fool is short shares of Kimberly Clark and Procter & Gamble. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$148.68 (-0.38%) $0.56
Helen of Troy Limited Stock Quote
Helen of Troy Limited
HELE
$136.72 (-0.52%) $0.72
Kimberly-Clark Corporation Stock Quote
Kimberly-Clark Corporation
KMB
$136.25 (-0.42%) $0.58

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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