Personally, I associate Chattem
The impetus for the nearly 30% rise in shares of Chattem in the past week has been the announcement that the company will be acquiring five well-known health-care brands, including ACT mouthwash and Cortizone anti-itch cream, from Johnson & Johnson
Chattem has been around for a long time and has largely grown its portfolio of oft-used products, such as Selsun Blue, BullFrog Sunblock, and Aspercreme, through product acquisitions from other companies. The five marketed products Chattem is acquiring from JNJ are estimated to have netted $115 million in sales in the most recent year, which means Chattem is purchasing them for approximately 3.6 times sales.
The one possible negative from the deal is that Chattem will be paying for it on credit and thus piling $425 million of additional debt atop its current $161 million. With a market cap of around $840 million and net income of $40 million for the first nine months of the year, Chattem is now highly leveraged, and investors should pay attention and make sure that the company starts to pay down this debt load aggressively.
Other than the product acquisitions, the rest of the third-quarter results for Chattem were in line with the company's guidance for the year. Revenues increased 9% compared to the third quarter of 2005 and net income climbed 62% to $15 million, which equated to $0.81 in earnings per share and net margins of 21% vs. last year's 14%.
If Chattem can reach its guidance for the year, then fourth-quarter revenues should be in the range of $60 million to $75 million and lead to earnings per share of $1.90-$2.20 for all of fiscal year 2006.
Trading at roughly 18 times the company's 2007 guidance of $2.50 or greater EPS (excluding stock options), shares of Chattem don't strike me as particularly expensive, since that would represent at least 14% growth compared to 2006 earnings.
With the newly acquired JNJ products, Chattem's management appears to have made another smart product purchase. If the new products can boost earnings by the $0.75-$1.00 that management expects in 2008, Chattem's investors won't be needing any pain-relief ointments for a long time.
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