Stephan Co ($SPCO) — 4Q20 Update (2/21/21)

$12m cap / 15x earnings - solid growth prospects

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Stephan is now a $3 stock — A far cry from the $1 price tag when I invested 5 years ago. Back then, the thesis was based entirely off a simple press release indicating the company had hit ~$0.20/sh in earnings, had excess cash, and was going to pay a $0.15/sh dividend annually (15% yield!).

More recently, they stopped the dividend in favor of pursuing acquisitions. Presumably to use up the $18m in NOLs a tad bit faster.

I wasn’t super excited about this approach vs. collecting my 15% dividend but I’ve held onto some shares to see how it plays out. I think the likely strategy is to grow the business via acquisition, use up a good portion of the NOLs and then sell to a competitor (like Sally Beauty).

Q4 performance…

Revenue was down, earnings were up, and cash flow was down from some heavy investments in inventory. In fact, from 2018/2019 to 2020, working capital (mainly inventory) has nearly doubled! (See financials below.)

Q4 results

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Quick stats…

SPCO $3.05Shares 4.06mMarket cap $12.4mNet cash $0.2m

(As of 2/21/2021)

Updated financials…

Stephan has consistently earned ~$0.15 to $0.20 per share over the past 5 years. Remarkably stable for a small business. At $3.05 that puts the stock at 15x trailing earnings.

Income statement…

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They’ve added some revenue and margin through acquisitions. 2020 performance was actually pretty stellar considering the impact COVID had on barbershops (the target customer for Stephan Co).

The balance sheet…

Most notable item here is the jump in inventory / working capital.

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Cash flow statement…

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Remember that starting in 2019, the company changed course in cutting the dividend in favor of M&A. They built working capital in 2020 but true to their word invested most of their capital in acquisitions during the year. We’ll see how these play out in 2021 and beyond.

Thesis…

This remains a small position as the valuation has moved higher. They seem to be taking a fresh approach to growing the company lately with $470k in acquisitions over the past 4 years and a growing e-commerce business… Heck, they’re even writing shareholder letters now!

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The returns on capital are huge at >50% cash ROIC so it’s no wonder they want to tuck-in more brands (especially if they aren’t paying any taxes).

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Beyond that, they’ve proven the business is stable — even in a downturn. The 15x multiple isn’t a screaming bargain but the business is a good one.