Re: [CANSLIM] Re: CHTT (was: Identifying NEW leaders)

From: Harvey Brion <hbrion@ieee.org>
Subject: Re: [CANSLIM] Re: CHTT (was: Identifying NEW leaders)
Date: Thu, 08 Aug 2002 13:20:23 -0700
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Thanks Katherine,  I now feel a little better about the debt but it is a bit
scary.  Normally, I'd expect buybacks when the debt is down and there's a lot of
cash lying around, but I guess it makes sense to go into debt to buyback shares
if (1) the stock price is considered way undervalued and (2) the cost of
financing (interest rate) the buyback is exceptionally low.

I calculated from the 10Q that the buybacks over FY99 thru Feb02 were made at an
average share value of $12.83 or 38% of the current price so they've made a
hefty return on their investment..  Sounds like they're managing their debt and
I guess we just have to "have faith."  -Harvey

Katherine Malm wrote:

> Hi Harvey,
>
> The high Long Term Debt to Equity comes from 2 sources: an aggressive stock
> buyback program (reducing equity) and a strategy of financing acquisitions
> via debt (increasing debt). The latest deal, for example, was a purchase of
> SelsunBlue from Abbott Labs for about $75m, financed with $45m in
> borrowings. The company seems to be fairly aggressive about using leverage
> where possible, and that is not surprising given the mature products that
> they take under wing in their portfolio reshaping program. They are also
> fairly aggressive about managing their debt facilities, most likely to take
> advantage of  lower interest rates where possible. For example, they sold
> Ban in early 2001, then used the proceeds to retire $52m in senior debt.
> It's not all that uncommon for companies to rejigger their debt to equity
> ratios given their chosen business strategies. Interestingly, in June of
> this year, they announced a proposed primary offering of 1.8m shares, but
> withdrew the offering, citing "adverse market conditions." While a D/E of
> nearly 400% sounds scary, the more important thing to look for is their cash
> flow and ability to cover interest payments. If financing acquisitions
> through debt also allows them to build a broad product offering and increase
> net income as a result, then the interest paid becomes an investment, so to
> speak. If they do a lousy job of executing their strategies (sell non
> performing brands, acquire others, extend existing lines), then the interest
> will kill them. So far, so good.
>
> Beyond the D/E issue...CHTT  was just an example thrown out in the
> discussion on "consumer stocks." Just as in the discussion of P&G earlier
> today, the "N" can come from many sources. Sometimes it's something as
> simple as leveraging a brand properly, as P&G has done with the Crest
> spinbrush and Crest Whitening Strips (by the way, about $50 for the box,
> premium pricing, but still a fraction of what it would cost to have it done
> with a special light activated process like Brite Smile's (BSML), or done
> "professionally" by a dentist.).
>
> Katherine
>
> PS
> Here are some quotes form CHTT's 10Q, which you can see in full at
> http://www.edgar-online.com/bin/edgardoc/finSys_main.asp?dcn=0000931763-02-0
> 02300
>
> "We have historically financed our operations and acquisitions with a
> combination of internally generated funds and borrowings. Our principal uses
> of cash are working capital, servicing and repayments of long-term debt,
> acquisitions, repurchases of our common stock and capital expenditures."
>
> "In fiscal 1999, our board of directors authorized repurchases of our common
> stock of up to $10.0 million in the aggregate. In April 2000, our board of
> directors authorized repurchases of up to an additional $10.0 million of our
> common stock. Under these authorizations, 172,500 shares at a cost of $3.9
> million were repurchased in fiscal 1999 876,500 shares at a cost of $9.5
> million were repurchased in fiscal 2000 and 14,000 shares at a cost of $0.2
> million were repurchased in fiscal 2001. In February 2002, we repurchased,
> and returned to unissued, 44,000 shares for $0.6 million. As of May 31,
> 2002, the remaining amount authorized by our board of directors under our
> stock buyback plan was $5.8 million; however, we are limited in our ability
> to repurchase shares due to restrictions under the terms of the indenture
> for our 8.875% notes and our senior credit facility.
>
> We believe that cash provided by operating activities, our cash and cash
> equivalents balance, the net proceeds that we receive from our currently
> pending offering of common stock after debt repayment and funds available
> under the revolver of our senior credit facility will be sufficient to fund
> our capital expenditures, debt service and working capital requirements for
> the foreseeable future as our business is currently conducted. Any
> acquisitions that we make in the future may require us to obtain additional
> financing."
>
> ----- Original Message -----
> From: "Harvey Brion" <hbrion@ieee.org>
> To: <canslim@lists.xmission.com>
> Sent: Wednesday, August 07, 2002 1:13 PM
> Subject: Re: [CANSLIM] Identifying NEW leaders
>
> > These look interesting Katherine.  It's hard to get excited about
> > cosmetics and weight loss products but with the high GRS rating, they've
> > obviously been doing well.  I see they all have strong EPS estimates for
> > this FY.  CHTT looks the strongest in cash flow and ROE and I favor
> > smaller companies anyway so I'd lean toward this one.  The chart is
> > pretty wide and lose, so not classic CANSLIM.  Do you have any idea what
> > their 389% debt to equity ratio is all about?  -Harvey
> >
> > Katherine Malm wrote:
> >
> > > Here's another view of "consumer" stocks--take a look at stocks like
> > > NBTY, WTW, CHTT, all of which have pros/cons, but nonetheless
> > > something unexpected. Who would've thought that HD might've done so
> > > well simply by consolidating a fragmented industry and redefining
> > > "home improvement"? Sometimes it's the unexpected which does the best
> > > while everybody else is looking to the obvious. Katherine


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