Saturday, June 28, 2008

Blyth: Punished Value Stock or a Trap?

Home goods company Blyth has fallen on hard times recently, and is down more than 50%in the past year. In fact, the Greenwich Connecticut based company has not traded at its current level since 1995. Unfortunately, in an economic environment where inflation is rearing its ugly head, housing has been in the toilet in many areas of the country, and consumers are feeling squeezed, some businesses will suffer the consequences, as Blyth has.

There’s just not a whole lot of interest these days in a company that operates in the “home expressions” business, which is a fancy way of referring to candles, home fragrances, and decorative accessories. Not exactly a recession proof business. Those are the kind of products consumers will shun long before giving up steak or ice cream.

As recently as May 29th, this was a $20 stock, with a decent 2.7% dividend yield. In fact, this company has been an exceptional dividend grower over the years, with a five year compound annual dividend growth rate of nearly 18%. That’s the kind of company I like, putting their money where their mouth is, taking the ultimate risk of raising the dividend too high, and having to make the unkindest of cuts. I also like these situations because dividends don’t lie (except, perhaps in the case of Allied Capital, where Greenlight’s Capital’s David Einhorn has made a pretty strong case to the contrary), while earnings aren’t exactly always honest.

Blyth’s recent 38% slide since the end of May was partially the result of a poor earnings release, partially due to rough market activity. Sales for Q1 fell 8% to $249.8 million from the same quarter last year, while earnings (excluding onetime charges) fell 52% to $6.5 million. Ex charges of $5.2 million to write off its investment in RedEnvelope, a publicly traded specialty retailer in which Blyth owned a 14% stake, the company earned $1.16 million.

Still, all the bad news aside, of which there is plenty, this may be the case of a company that Wall Street punished a bit too quickly and severely. Despite its near term issues, Blyth still has a very solid balance sheet with $147.5 million in cash and $15 million in short-term investments, or nearly $4.50 per share. Blyth also carries another $21.6 million in long-term investments, but since this includes auction rate securities, we’ll assume, for arguments sake, they have no value. (Blyth does carry long term debt of $155.2 million.)

Currently trading at just .43 times trailing 12 month sales, the market has all but written this company off in the near-term. Recent company guidance suggests full year 2009 earnings in the $1.26-$1.31 range, and cash flow of $90 million. While you should always view such forecasts with skepticism, even a haircut to these numbers should still allow Blyth plenty of room to keep from cutting the dividend.

Of course, the real catalyst here, besides the realization that the punishment has not quite fit the crime, is a pickup in economic activity. No guarantees there.

Finally, I like the fact that Blyth continues to buy back stock, and has reduce shares outstanding 3 million shares in the past year. Only time will tell if Blyth represents true value at these levels, or is just another trap.

*The author has a position in Blyth. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

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