Thursday, February 4, 2010

Parlux Gets Cheaper

Yesterday, Parlux reported a net loss of over $5 million. The company has recently faced a slew of negative information that has pushed the stock price down significantly. Since Parlux (PARL), producer and marketer of celebrity fragrances, was first brought up on this site, it has fallen almost 20% while the broader market has risen. But for investors who purchased this company for the reasons outlined some six months ago, the current price offers even more reason to buy.

The company appears to have made some bad calls leading into the quarter that just ended. With consumer spending on the decline, the company had locked itself into some expensive marketing campaigns that didn't pay off in the current economic environment. The resignation of the company's CEO last month further wore on the company's shares, as the company's future strategy became uncertain.

However, the reason this company is attractive as a buy remains unrelated to its short-term earnings outlook or even its corporate strategy, which are the two major reasons for the stock's poor performance of late. Instead, what investors are buying is a company with assets that far exceed the company's current asking price. While the stock trades for just $35 million, the company has cash, receivables and current inventories totaling $87 million against total liabilities of just $17 million. As a Ben Graham net-net, the company offers upside potential at this price that is far superior to its downside risk.

Of course, there are risks that the company will not be able to profitably collect on all of these accounts. Inventories have been written down in the past, and some of the receivables are from a related entity that is losing money. (Fortunately, this entity is a public company, so its ability to pay can be judged by the investor.) But there is a sufficient margin of safety present to protect the investor from such issues. Furthermore, despite the company's troubles of late, it has actually managed to increase its cash position as it has liquidated inventory and reduced its receivables. With a new CEO promising to be more cautious when it comes to spending, the company may be able to turn in better results that push the stock price back to a more reasonable level.

Decent returns on capital and substantial earnings growth are not necessarily in the cards for this company. But nor are they required for the investor to see strong returns. The company is being sold at such a large discount to its assets that even mediocre results in the coming quarters should result in decent cash flow and a share price that better balances downside risk with upside potential.

Disclosure: Author has a long position in shares of PARL


Jimmymac said...

Isn't this new CEO the former CEO and founder who was considered one of the worst CEO's in a poll? Not sure how confident we can be in someone like this turning around the company.

Saj Karsan said...

Hi Jimmymac,

Not the same guy!

Anonymous said...

Are you certain it isn't the same guy? It sounds like it is, though on an interim basis until a permanent CEO is found. This is from the Q:

"On January 26, 2010, we announced that Frederick E. Purches, founder of the Company, and previous Chairman, has assumed the position of Chairman and Interim Chief Executive Officer of the Company. Mr. Purches was previously the President and Chief Executive Officer of Helena Rubinstein/Giorgio Armani Fragrances before founding Parlux, and has served as a consultant to Parlux for over fifteen years. Our Board of Directors intends to undertake an executive search for a permanent Chief Executive Officer, and has not established any timeframe to complete that search."

Anonymous said...

My mistake. The worst CEO was Lekach.