The 2013 Retirement Portfolio Candidates: Sally Beauty Holdings

by Lawrence Meyers | April 19, 2013 9:01 am

I really want a boring stock in my retirement portfolio. Actually, I’d like more than one. Peter Lynch likes boring stocks because they tend to fly under the radar, quietly making big money and resting firmly in value territory until they are eventually discovered. They tend to be big cash flow generators, and offer some kind of infrastructure that other businesses need.

Sally Beauty Holdings (NYSE:SBH[1]) is, in my mind, an infrastructure play. You might think I’m crazy, but follow my logic for a minute.

Sally handles distribution and retail sales of professional beauty supplies in North America, South America and Europe.

On the one hand, the company operates retail stores themselves, which sell all the beauty accessories women use. The company also operates as a distribution business, selling high-end beauty products to salons.

The distribution business is the infrastructure behind a salon. However, the products themselves — and the stores — are the infrastructure for women. I mean that literally. Beauty supplies are a requirement for women in Western culture. They are almost as “necessary” as your daily coffee from Starbucks (NASDAQ:SBUX[2]).

This is evident in the company’s performance during the financial crisis. FY2008 profit was $81 million, rising to $99 million in 2009, then exploding to $143 million, $213 million and $233 million in FY2010, 2011 and 2012, respectively.

That’s why infrastructure is important.

The distribution business itself is something I love, because it has a relatively high barrier to entry. A rival must cultivate relationships with salons.

Sally is also shockingly ubiquitous — well, it’s shocking to me, anyway. The company has 4,315 company-owned stores, 184 franchised stores, and 1,044 professional distributor sales consultants all over the world. That’s a massive footprint.

Financially, SBH consistently churns out $230 million in annual free cash flow. Sally sits on $148 million in cash, and $1.6 billion in debt — though it’s comparatively expensive at about an 8% interest rate.

After hitting a low of $5 in early 2009, the stock has leaped 500%. It’s exactly the kind of business that is so stealth and successful that private equity funds are all over it. Seven of the top 10 institutional holders are private equity, and own a combined total of 33% of the company.

Furthermore, Sally is growing at 15% in a weak economy, again demonstrating its resilience as an infrastructure play.

The company trades at 19x estimates, which is just a wee bit expensive. However, as a long-term play for a retirement portfolio, it’s not so outrageously overpriced to not consider buying it.

And that’s what I’m doing.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities, but is considering a purchase of SBH in the next two weeks.

Endnotes:
  1. SBH: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBH
  2. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX

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