The Stephan Co

Ticker
$SPCO
Industry
Distributor
Type
Compounder
Rating
Covered
Category
Option
Target Price
$2.60
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Stephan Co is a distributor of proprietary and third-party products to barbers. I started buying this stock around $1 in 2016 so it is a very different bet today than from my initial purchase.

Notes

Capital allocation — Formerly was a big payer of semi-annual dividends — starting in 2019, management shifted to favoring acquisitions to take advantage of NOLs
  • Dividends were $0.60/share in total from 2015-2019
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Insider ownership — CEO owns 1.2% of shares and board members own another 50.4%
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Financials & Valuation

Resources

August 2022 — M&A continues, WC build draining cash flow

Revenue grew 10% as acquisitions are starting to contribute but EBITDA (adjusted) was flat at $132k. Inventory continues to build and now sits at ~22% of sales compared to <10% a few years ago. This has consumed most of the company’s cash flow since 2019 ($2.04m WC build from 2019 to 1H22).

Acquisitions continue to be the focus and SPCO has done 5 deals for $1.02m since 2017 with a 6th completed in August 2022 after quarter end (unknown purchase price on #6).

TTM EBITDA is $534k and net debt is close to zero. There are 4.09m shares outstanding x $2.20/sh = $9m market cap and enterprise value. That’s a 16.8x EV/EBITDA multiple which is pretty high but SPCO turns a huge portion of EBITDA into earnings — close to 80-90%. EPS has ranged from $0.15-0.19 since 2016 with consistency. That’s a more reasonable 13x PE at mid-point.

From a valuation standpoint, SPCO looks fairly valued. I continue to hold my shares as a small weighting given the clean balance sheet, consistent earnings with minimal volatility, and a management/board with skin in the game trying to grow through acquisition. For now, I’ll assume SPCO is capable of generating $0.20/sh in earnings ($10m revenue x 8% margins [consistent with historic levels]) and a 13x multiple = $2.60/share price target.

February 2021 — VDL: 4Q20 earnings review
January 2020 — VDL: Initiation report