I’ve admired Steiner Leisure (NASDAQ:STNR) for a long time. Its main business is operating spas on cruise ships, currently serving 152 cruise ships around the world — including 33 for Royal Caribbean (NYSE:RCL) — by providing cruise-goers with a few hours of peace and relaxation along their journey.
However, over the years it has expanded into land-based spas, skincare products, laser hair removal and the operation of post-secondary schools related to its various businesses.
Following the Sept. 11, 2001, terrorist attacks, the cruise business went through a difficult period of adjustment as vacationers opted to stay closer to home. Steiner, in its position as spa service provider, was caught in the middle. It didn’t matter how good its services were if the ships weren’t full to capacity. Yet despite doing business with one hand tied behind its back, STNR managed to muddle through the crisis and today is a stronger company as a result.
In the past decade, Steiner’s revenues have grown in nine out of 10 years through a combination of acquisitions and organic growth. While it always has generated more service revenue than product revenue, its current diversification into laser hair removal facilities has reduced its reliance on its spa operations. In the future, it will likely seek out complimentary businesses to acquire that further its diversification efforts.
Steiner always finds a way to make money regardless of the economic headwinds. Its free cash flow generation is very consistent; its current cash return — free cash flow plus interest expense divided into enterprise value — of 9.5% is higher than most, suggesting its stock is undervalued at the moment. Since the beginning of 2011, STNR’s average annual total return has averaged -1.7% at a time when the S&P 500 has delivered an annual total return of 21%.
Long-term, I think Steiner is a winner.