Quick! Name a consumer products company trading with a P/E in the low 20's that's actually growing its profits by more than 20% a year for the past couple of years, as well.
Procter & Gamble (NYSE:PG), Pfizer (NYSE:PFE), and Schering-Plough (NYSE:SGP) are all great companies with brands that have experienced tremendous growth over the years. Still, none of them can compete with the solid 20% plus growth that Motley Fool Hidden Gems selection CNS (NASDAQ:CNXS) has posted of late.
Very strong growth
For the last few years, the maker of Breathe Right strips and Fiber Choice tablets has been all about growth. While it may seem odd that the little strips football players and other athletes wear across their noses are a growth business, it makes a bit more sense when you consider that they also help snorers to snore less and help folks who are congested from a head cold or the flu to breathe better. I must admit that I was skeptical about the product at one point as well. But after my snoring caused my wife to struggle to get to sleep one night, she insisted I give the strips a try, and she can attest that the improvement was noticeable.
So where were we? That's right. Growth. Rather than me blathering on about how strong the numbers have been, I opted to put them into a chart instead. As you can see, it's not just sales growth that has been strong but also operating profits, net income, and diluted earnings per share.
Y-o-Y Growth
| 2005 | 2004 | 2003 | |
|---|---|---|---|
| Sales | 7.7% | 10.0% | 15.8% |
| Oper. Income | 73.3% | 20.8% | 118% |
| Net Income | 61.2% | 30.8% | -53%* |
| Diluted EPS | 22.6% | 57.6% | NM** |
** Not meaningful due to tax gain.
There are a couple of things to take away from the above chart. The decreasing sales growth is initially concerning, but the numbers were soft last year because of weak shipments of the company's Breathe Right products to Japan. Through the first half of this year, sales are up 35% versus last year, and diluted EPS is up 63%. The other takeaway is that the company has some fairly substantial operating leverage, which means that as sales increase, operating expenses increase at a slower rate. This leads to profit growth that exceeds sales.
There is more to CNS than sales and earnings growth. The company also boasts free cash flow in line with its net income performance and a very clean balance sheet flush with $59 million in cash and no debt.
And the future looks bright, too
All of the past growth is wonderful, but we don't buy stocks for their past performances. We buy them for what they can deliver in the future. It looks like the company's continual improvements in marketing and innovative new products will continue to deliver growth in sales and profits.
Let's tackle the marketing issue first. Quite simply, the company needs to increase the awareness of its products, and it has been doing so. Last year, the company ran a targeted multimedia marketing campaign toward snorers like yours truly and increased sales of its nasal strips by 21%. The same marketing program is being expanded this year, and additional marketing on television will be run, as well.
The other aspect to the company's growth plans is the expansion of its current product lines. In the last year, the company launched clear (as opposed to beige) Breathe Right strips, and this new product, along with new mixed fruit chewable Fiber Choice tablets, was responsible for much of the company's growth. To keep the growth going, the company recently expanded its line of Fiber Choice tablets further by adding a product that includes Calcium and another product to the line up for dieters that includes Chromax.
Foolish final thoughts
A large part of the reason CNS shares have advanced 121% since being selected in Hidden Gems two years ago is because the company's shares didn't reflect the strong profitability of the business or its growth prospects. Today, I estimate that the shares fully reflect the profitability of the business and an assumption of 8% to 10% growth over the next five years. However, if you expect growth to be in the 12% to 16% range, then a price of $30 to $35 per share looks very reasonable. Considering the 20%-30% growth of the last few years it looks like CNS still has some room to run.
Wait! You're not done. This is just a quarter of the duel! Don't miss the Bear opening argument and the Bull and Bear rebuttals. Even when you're done, you're still not done. You can vote and let us know who you think won this duel.
Nathan Parmelee has a beneficial interest in shares of CNS but no financial stake in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
