Prestige Brands Seen As A Prime Takeout Candidate On Cash Flow Strength, Earnings Growth

Prestige Brands Holdings, Inc. PBH, a seller of over-the-counter healthcare and household cleaning products, was named as an ideal take-out candidate by analysts at DA Davidson.

DA Davidson's Linda Bolton Weiser initiated coverage of Prestige Brands' stock with a Buy rating and $79 price target in 12 to 18 months and a five-year price target of $135. The analyst is mostly attracted to the company's transformation over the years from a portfolio with 65 percent of sales in "Invest for Growth" brands back in 2013 to today where 85 percent of sales come from core brands. This supports the company's growth profile of 4 to 5 percent in organic growth for core brands which represents an improvement from just 1.5 percent in 2013.

Over the same time period Prestige Brands managed to grow its sales from $600 million to $1 billion with the ultimate objective of growing to a $2 billion consumer healthcare company.

Bolton Weiser went on to highlight Prestige Brands' free cash flow per share profile, which the analyst estimates at $3.75 in fiscal 2018 and higher than an earnings per share estimate of $2.55 (versus $2.17 per share in fiscal 2016 and estimate of $2.36 in 2017). This is attributed to low cash taxes, high amortization expense and low capital spending.

Take Out Profile

Bolton Weiser also argued that Prestige Brands is a potential take-out target given a double-digit earnings per share growth profile. In fact, the company defended itself against a hostile takeover in February 2012 from a drug company called Genomma Lab at a 23 percent premium at that time.

The analyst believes a generic Rx drug company would want to acquire Prestige Brands to penetrate the OTC drug market. The logic for this would be similar to Teva Pharmaceutical Industries Ltd (ADR) TEVA 2011 partnership with Procter & Gamble Co PG.