You just gotta love small, obscure companies with good brands that people have to keep buying over and over again. Now, that general description may apply to several companies, but today I'm talking about Chattem (NASDAQ:CHTT) -- the company behind brands including Icy Hot, Gold Bond, and Dexatrim.
The story with these consumer-goods companies often has more to do with solid returns on capital and good consistent cash flow growth more than with rabid top-line growth, and Chattem is no exception. Of course, 23% revenue growth (when excluding a divested product) is nothing to sneeze at, either.
Those not really familiar with Chattem may wonder how I can be positive about a company whose margins fell and adjusted net income was up only 10% from last year. Well, the answer, my friends, is context. In other words, why did the margins fall?
In this case, a big culprit was the company's increased marketing expenditures to support newer products like Icy Hot Pro Therapy and Selsun Salon. In other words, investing in new products. Given the company's past success with similar moves, I'm more than willing to look past a few quarters of damaged margins.
I also can't help liking the potential I see in this business. Although historically a company that has built itself through product acquisition, the company has more recently begun to focus on internal development. I also note that international sales are less than 10% of the total. Considering what companies like Procter & Gamble (NYSE:PG), Unilever (NYSE:UL), and Colgate-Palmolive (NYSE:CL) have been able to do in terms of international growth, this, too, could be a future growth opportunity for Chattem.
Now, certainly there are risks here. Chattem has more debt than I like to see in a small company, as well as huge competitors (like P&G) with fat wallets when it comes to promotional and developmental activities. And also don't overlook the impact and power that retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) can wield -- if they opt to cut SKUs, that can be a painful blow.
I don't own Chattem today, and I'm not sure how likely I'll be to own it once my 10-day blackout period expires. By my numbers, it's just on the cusp of being a good value but still a couple of points away. Should the market sleep on this one a bit and bring it within my margin of safety, though, I might be adding this company to my shopping basket.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
