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A Stock So Boring, It’s Beautiful

Sally Beauty Holdings is a classic boring Peter Lynch play


Readers of my column know that from time to time, I come across a really boring company … and as a Peter Lynch fan, there’s nothing better than a boring company. These stocks plow right along for decades and offer great returns, all the while going unnoticed by the big institutions.

Today’s little discovery is Sally Beauty Holdings (NYSE:SBH). And if you’re like me — namely, male — you probably could care less about its products.

The company engages in the distribution and retail of professional beauty supplies in North America, South America, and Europe. They run under two segments. The first actually operates the retail stores themselves, which sell all the beauty accessories your favorite women use (skin, nail, hair, etc.). The other segment operates as a distribution business. Sally puts its sales force to work and sells beauty products to salons, sticking to high-end stuff like Paul Mitchell and Sebastian.

It’s one thing to run a bunch of retail stores that do well. That’s a trick in and of itself, especially when you think of all the beauty supply gear you can find at local drugstores. But Sally wisely added a distribution angle to its business. If a company can earn a good reputation as a distributor, it adds a revenue stream that has a higher barrier of entry.

If you’d never heard of it before (and I hadn’t), that means we’ve missed Sally’s 4,315 company-owned stores, 184 franchised stores, and 1,044 professional distributor sales consultants all over the world. What I won’t miss, however, is 13% earnings growth this year, 17% next year, and long-term growth expectations of 15.2%.

While you’re putting lipstick on this beauty, note that the company consistently churns out $200 million in annual free cash flow. SBH sits on $240 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 400%. It’s exactly the kind of business that is so stealth and successful that private equity funds are all over it. Four of the top 10 institutional holders are private equity, and own a combined total of 16.6% of the company. That’s a great vote of confidence. So is the 13% insider ownership.

There aren’t any real direct competitors as far as I can tell. One might say that the drugstores — CVS (NYSE:CVS), Walgreen (NYSE:WAG), even Walmart (NYSE:WMT) — are competitors, but not in the direct sense. It really is a specialty niche. There’s also evidence to suggest that these accessories are considered staples by women, and not discretionary.

The company did very well during the financial crisis, and even grew earnings substantially. FY 2008 profit was $81 million, rising to $99 million in 2009, then exploding to $143 million, $213 million and $233 million in FY 2010, 2011 and 2012, respectively.

This is the kind of company that is growing strongly (at 15%) in a weak economy, so investors should take notice. Especially considering the stock trades right at 15 times forward earnings estimates, I’d strongly consider buying Sally Beauty now.

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at He also has written two books and blogs about public policy, journalistic integrity, popular culture and world affairs.

Article printed from InvestorPlace Media,

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