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Investing Specialists

Stock Your Shelves with This Cash Machine

We think the market underestimates Prestige Brands' persistently high cash flow.

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 Prestige Brands (PBH) is a typical small, fly-under-the-radar company, which is exactly what we like. It also happens to have an unusual business model--another plus in our book. Best of all, the company currently trades for less than 6 times free cash flows. We figured we'd find some hair on the company--and we did--but not nearly as much as we expected. Prestige is not a great company by any means, but it is dirt cheap, and there are some reasons to believe that performance will improve over the next few years. We wrote about this firm in Morningstar Opportunistic Investor on June 8. We subsequently purchased Prestige Brands for about $6.30 per share. Although the stock is up a bit since then, we think it's still an attractive opportunity.

Company Profile
First, let us introduce Prestige's most important product lines: Chloraseptic (sore throat medicine), Clear Eyes (eye drops), Compound W and Wartner (wart removal), and Comet (cleaning solution). These are the most important bits of its portfolio, but Prestige also owns things like New-Skin (liquid bandages), The Doctor's Nightguards (anti-teeth grinding), Little Remedies (infant medicine), Spic and Span (cleaning spray), Cutex (nail polish remover), Murine (ear drops), and many more.

At this point, you may be a bit confused. How did a little company like Prestige end up with this huge basket of brands? The answer is that they were all acquired. Prestige's business model is simple: It buys small, niche brands, injects some marketing into them, and tries to generate as much cash as possible. These tend to be small in absolute sales but are strong and well-known within their individual categories. We think most readers would recognize most, if not all, of their top brands. The company outsources most manufacturing, distribution, and even some R&D. Instead, it focuses on account management and marketing. Marketing is key to this story. One of this business model's most powerful engines is that the acquired brands were often ignored by their previous owners or underinvested in. By committing greater resources, both in introducing new product extensions and in additional marketing, Prestige attempts to rejuvenate these properties.

Michael Tian does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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