Whenever I look at a new company, my goal is to figure out as quickly as possible whether it fits into one of my two "green light" investment categories: (1) a great company at a good price, or (2) a good company at a great price. Everything else -- other than rare special situations -- is a "red-light" no-go.
There are a lot of ways to go about assessing quality and price, but one of the most straightforward, especially for mature companies, is the Rule Maker test. As longtime Fools know, a Rule Maker is a company that manufactures products and provides services bought every day or every week by tens of millions of people the world over. This sale of the same profitable item, over and over, results in the methodical accumulation of a mother lode of cash on a Rule Maker's balance sheet. (That's the ideal, at least.)
Today, we look at our next consumer non-cyclical, Blyth Inc.
That's Mr. N
on-cyclical to you
If you're scratching your head, saying "consumer non-what?" let me catch you up. We're in part five of a series searching for companies that will fare well even if the economy doesn't rebound strongly in the coming year or two (as the Fed and mainstream media expect). I've targeted the consumer non-cyclicals because these companies typically have the ability to maintain decent sales and earnings in all economic seasons -- hence the "non-cyclical."
Whereas consumer cyclicals tend to sell expensive, durable goods (autos, furniture, home appliances, etc.), consumer non-cyclicals tend to sell inexpensive, disposable products. Blyth is a perfect example, with its business of making candles, fragrances, and home decorative products, including picture frames and lamps. None of these is precisely a life necessity, but all are the types of things most people will buy, say, every few months -- if for no other reason than because they make easy gifts.
A little more background: In the most recent year, revenues for the Greenwich, Conn.-based Blyth came in at $1.29 billion, up 13.4% annually over the past five years. And in each of those five years, it generated positive free cash flow and a return on equity no less than 15%. In spite of those fairly impressive numbers, the stock's P/E is a reasonable 13.2, with a 1% dividend yield.
The question remains, does that reasonable price buy you a good company or a great company? Let's use the Rule Maker criteria to sort it out.
1. Must have at least one sustainable competitive advantage. The more, the better.
Blyth's consistent profitability suggests that it has some type of advantage, and I suspect it might be the company's portfolio of consumer brands. About half of overall sales is generated from the company's PartyLite division, which sells candles directly to consumers via the party method. For what it's worth, I asked my wife about PartyLite candles, and she said they were "just OK -- on the expensive side." Maybe there's something I'm missing, but my impression is that whatever competitive advantage exists is relatively weak.
2. Must be dominant in its industry.
Blyth can be regarded as a "leading player" in candles and home fragrances. For example, Blyth is larger than its closest branded candle competitor, Yankee Candle
3. A Rule Maker has been dominant for more than a decade.
We've already established that Blyth isn't dominant, but it does have longevity. The company was founded in 1977 when it acquired the Valley Candle Company, a Brooklyn, N.Y.-based business that sold white non-fragranced candles to religious organizations. It grew through a string of acquisitions in the 1980s and early 1990s, and then went public in 1994. As such, we have nearly a decade's worth of publicly available financial data showing Blyth to have been consistently profitable since 1993. That's a worthy accomplishment, but it still falls short of sustained dominance.
4. Free cash flow margin in excess of 10%.
Rule Makers should generate lots of the green stuff, and thus we want to see a free cash flow (FCF) margin of at least 10%. If you look just at the past 12 months, Blyth qualifies with an FCF margin of 10.8%. But over the past five years, its average FCF margin has run a bit lower at 8.3% -- still good, but not up to the 10% hurdle. Also, management has announced it expects free cash flow this year to be around $110 million on expected sales of $1.5 billion, meaning an FCF margin of 7.3%.
5. Efficient working capital management, measured by a Foolish Flow Ratio below 1.25.
The ideal for a Rule Maker is to have such market power that it can bring money in quickly, but pay it out slowly. The better a company can do this, the lower its Flow Ratio. Blyth, however, comes nowhere close. Its Flow as of April was 2.07 -- and that was the lowest reading in two years. Kudos for improvement in its working capital management, but Blyth isn't yet up to Rule Maker standards.
6. Sales above $4 billion per year and growing revenues at 10% plus.
A true Rule Maker should be large and growing vigorously through organic (i.e., internally generated, non-acquisition) sales growth. While Blyth's five-year sales growth rate of 13.9% nominally meets this criterion, its growth is largely a result of acquisitions. Its existing businesses have only been growing modestly in recent years. Blyth management would be happy just to generate 3% to 7% ongoing growth from its current businesses. That's not bad, but it's not up to Rule Maker snuff.
7. Best-of-class management.
This can be a tough one to gauge, but I do see several signs that Blyth management is capable and shareholder-oriented. For one, Chairman and CEO Robert Goergen has been at the helm since the company's founding, 25 years ago. His compensation is reasonable, option grants are very modest, and he continues to own nearly 27% of the outstanding stock. Also, Blyth has been savvy in buying back stock, having repurchased 8% of the company over the past four years. Finally, the company recently increased its dividend for the third consecutive year. All told, I give Blyth's management the nod.
8. Return on invested capital (ROIC) above 11%.
ROIC measures the amount of money a company creates using its capital base. A company that produces anything below 11% is not providing enough return to compensate investors for the added risk of buying individual equities. Blyth, however, is well above this minimum. Over the past five years, Blyth's ROIC has averaged a very respectable 17.6%.
9. 1.5 times more cash than debt.
Since a Rule Maker is expected to generate cash galore, it follows that a Rule Maker shouldn't be expected to have much debt. And while Blyth has been a consistent cash producer, it has also spent a lot of this cash -- and then borrowed even more -- in order to acquire some of its present businesses. As of April, the company had $126 million in cash and $196 million in debt -- almost the exact reverse of the ratio we'd like to see. Its debt isn't at all problematic, but just a reflection of its acquisition-based growth strategy. Still, this falls short of the Rule Maker standard.
10. A reasonable purchase (or holding) price.
As mentioned earlier, Byth's trailing P/E is 13.2. With this year's EPS expected at $2.10, the forward P/E is even a bit lower at 12.5. Finally, based on expected free cash flow of $125 million for this year, its enterprise value (market cap + net debt)-to-FCF ratio is a reasonable 11.7. All of those multiples are within the realm of reasonability.
Conclusion
Add 'em up and Blyth meets only three out of the 10 criteria for Rule Makerhood. Admittedly, it's a tough test. Scoring 30% doesn't mean Blyth is a failing company, only that it fails to qualify as a Rule Maker. I'd characterize Blyth as a good company at a good price. That's not bad, but it's neither a great company or a great price. Ah well, 'tis the fate of the discriminating stock picker.
On Monday, I'll be back to review one last consumer non-cyclical, again from the Rule Maker perspective.
Matt Richey ([email protected]) is a senior analyst for The Motley Fool. At the time of publication, he had no position in any of the companies mentioned in this article. The Motley Fool is investors writing for investors.
