It's a Beautiful Time to Buy This Cosmetics Retailer

Bad news for existing shareholders can be wonderful for those looking to buy. That appears to be the case right now with Sally Beauty Holdings . Why do I say that? Since the end of fiscal 2012, which ended Sept. 30, 2012, Sally Beauty almost doubled its revenues and earnings per share, while seeing cash flow rise by more than 112%. Those represent solid, but unspectacular, growth. What makes SBH so attractive right now, then? Amazingly, the Friday share price sat 22.2% below where it registered exactly 10 years earlier. By definition SBH suffered price-to-earnings compression. From 20.2-times earnings exactly a decade ago today's shares now fetch only about 7.5-times current year's recently increased EPS estimate. A more typical multiple for SBH has run about 15-times. At peaks from 2012 through 2016 SBH topped out at from 19.9-times to 23.7-times earnings. The stock peaked between $28.30 and $35.30 during that span. EPS never exceeded $1.65 over those five years. There's absolutely no reason for a company posting all-time record profits, and accelerating profit growth, to stay saddled with a single-digit P/E. A rebound to a still sub-par, 14 multiple, could easily justify a rebound to north of $36 by this time next fall. Independent research from Morningstar is computer generated, rather than analyst input. Morningstar's very conservative present-day, not year ahead, fair value estimate sits at $23.35. That represents just nine times the already in progress fiscal 2022. There would be no harm from simply gaining 20% or so quickly but I feel strongly that Morningstar's projected price is way too low. Yahoo Finance also weighs in positively on SBH's prospects. Once again, though, its $24.17 12-month goal price appears very chintzy at just 9.3-times expected EPS. Both those target prices are well below where SBH peaked, at $25.66 last May. Since then, Sally posted two straight positive earnings surprises. The stock is ahead by almost 67% YTD yet is down 24.1% from its recent May 7 peak. That's why current holders might be unhappy while new buyers should be ecstatic. Sally Beauty has been firming up its balance sheet. Book value went from negative $2.81 at the end of FY 2017 to an estimated positive $4.55 per share by Sept. 30, 2022. Free cash flow was strong enough to accomplish that while also shrinking shares outstanding by around 15% over that five year span. Traders shouldn't waste opportunities like this, when measurable value has surged while the stock price declined. Periods like this almost end up being resolved via P/E expansion which arbitrages away the value/price mismatch over time. Large-cap tech stocks like Apple , Oracle and Microsoft experienced that phenomenon not too many years ago. They've since gone from historically low price-to-earnings to well above normal multiples, generating huge gains for their shareholders. Nobody can predict the timing of changes in investors' mindsets. That said, the ultimate reversion to the mean in valuation is almost certain to occur if you have a little patience. My article tomorrow will detail a beauty-related stock with exactly the opposite valuation characteristics. Buy SBH shares, and consider selling SBH naked puts out to January of 2023 or even Jan. 19, 2024.

It's a Beautiful Time to Buy This Cosmetics Retailer

Let's look at how bad news for current shareholders can be good news for new investors of SBH.

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