Playtex Products (NYSE:PYX) shareholders must feel like they've been snapped by one of the company's latex gloves. The shares plunged more than 25% in morning trading after the company warned of lower earnings for full-year 2004. Ouch!
Head to the company's website, and the business sounds great. According to Playtex, roughly 97% of its net sales were from products No. 1 or No. 2 in their respective markets. How can this commanding presence result in so much financial pain?
A root cause is giant rival Procter & Gamble (NYSE:PG), and a raging tampon war that whittled Playtex's market share to 26.7% over the past year. In a defensive move, Playtex launched its Beyond brand in January, but it's been a bitter fight.
A second cause is Playtex's debt. Companies typically find debt-to-equity ratios of 0.35 to 0.50 comfortable; Playtex's is a stratospheric 32.85. As part of a restructuring initiative, the company plans to sell $450 million in senior-secured notes. The restructuring, while a step in the right direction, will not relieve the strain from a debt load currently at $790 million. Ouch.
Playtex shares have rebounded off a 10-year low of $5.55 plumbed in June 2003. Still, at just over $6 this morning in trading, the stock is nearly 60% off its June 2002 peak of $14.25 a share. And the road ahead is cloudy.
Today's earnings guidance is for $0.30 to $0.33 per share in 2004. That's flat to slightly higher than the $0.30 earned in 2003. But again, 2003 had been a rough year, so more was hoped for in 2004. At the high end of guidance, the stock trades at a 19 times forward earnings multiple, which might strike some as attractive.
At the same time, Moody's reaffirmed its negative outlook on the company's debt after today's announcements. Besides the size of the debt load, Moody's noted: Wal-Mart's (NYSE:WMT) 25% hold on total sales; P&G's inroads; and "unfavorable operating trends in many of its other product categories." That's one ugly combination.
For investors intent on holding this one as a turnaround, the upcoming conference call on Feb. 10 will be a must-hear. It seems almost a shame given the company's brands, but this combination of concentrated sales, high debt, and relentless competitive pressures makes Playtex an extremely speculative investment.
W.D. Crotty has watched Playtex for a long time and not found the risk worth taking. To discuss Playtex or P&G with other investors, visit the Motley Fool discussion boards. For a 30-day free trial to the discussion boards, click here.
You can reach W.D. via email.
