There was a train wreck yesterday on Wall Street. It happened when Prestige Brands
That's not to say the company is a huge money loser. For the quarter, it actually generated $4 million in net profits, or $0.08 per share. That was a 28% improvement over the $3.1 million profit, net of adjustments associated with acquisition activity, that it posted in the year-ago period.
The problem, first of all, was that Prestige wasn't even close to hitting Wall Street's expectations of $0.15 per share. And then there was revenue, which fell 6% to $63.6 million. In fact, revenue was weak across the company's three product segments: over-the-counter medicines (down 5% to $32.9 million), household-cleaning products (down 6% to $23.2 million), and personal-care products (down 10% to $7.5 million). The Street met this news by drubbing the stock for more than 40% of its value. It's currently trading at around $11.
Prestige Brands is a collection of basic consumer brands that several private equity groups began to bring together in 1996. In early 2004, another private equity firm, GTCR, bought the company and accelerated the acquisitions program. The result is a myriad of brands that includes Murine, Chloraseptic, Sleepeze, Compoz, Denorex, Cutex, Prell, Ezo, Oxipor, Comet, Spic and Span, and others.
Early this year, GTCR took Prestige public. It was very good timing; the private equity firm generated a threefold return on its investment. But now it looks as though Prestige is suffering from M&A indigestion. In my opinion, the folks behind Prestige are good financial engineers in terms of maintaining cost structures -- they were able to generate higher profits on lower sales. But this appears to be a top-line issue, which is much harder to manage, especially when the brands are not as strong: The strategy for Prestige has been to focus on second- and third-tier brands. And in fairness, given the sheer number of disparate brands under one roof and the rate at which the company has acquired them, I think it will have a difficult time cultivating any meaningful brand identity.
The company says revenues and profits will be flat or even down for the current fiscal year -- proving that managing a large number of brands is no easy task. And the lower-tier brands may be cheaper to buy, but perhaps you really do get what you pay for.
The drubbing the stock got yesterday means that it's dead money for the rest of the year. It boils down to this: Investors cannot rely on management's expectations of the underlying business. And given the company's reliance on M&A for growth, its low stock price will be a big problem. After all, besides raising money (and cashing out GTCR), Prestige had an IPO to create a liquid market in its stock, which it can use to buy other companies. Acquisitions will be more dilutive with the lower stock price. And the possibility exists that sellers may instead want cash, not stock, if they are to cut a deal with Prestige.
Basically, roll-ups make sense, so long as a company can continue to grow and have a strong stock price. Neither appears to be the case for Prestige.
Fool contributor Tom Taulli does not own shares of any companies mentioned in this article.
