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In the spirit of the request for presentations, here is another that I've been looking into. It is certainly “Buffettesque” in that it is a very boring but high ROE business. It is the candle maker, Blyth Inc. Here is my analysis.

Blyth Inc

This is from Hoover's: “Blyth makes wicks on sticks. The company's products include unscented and scented candles, citronella candles, portable heating fuels, gift bags, and fragrance products, including potpourri. The largest candle maker in the US, Blyth sells its products under brand names such as Colonial Candle of Cape Cod, Carolina Designs, PartyLite, Candle Corporation of America, Sterno, and Handy Fuel, among others. Sold in the US (which accounts for about 73% of sales) and internationally, Blyth's products are sold through home parties and retailers. It also supplies institutional customers such as restaurants and hotels. Blyth is expanding in Europe. Chairman, president, and CEO Robert Goergen owns about 27% of the company.

Business Summary
Blyth is the major manufacturer of candle products in the USA. As you will see below, it has had a stellar earnings growth record over the past seven years. However, it has recently hit a bump in the road, which the company attributes to the economic slowdown, exchange problems arising from the weak Euro, and write-downs related to a decision to exit low margin businesses such as citronella candles. Blyth has two major business segments: the Candles and Home Fragrance products segment, and the Non-fragrance products segment. The former segment was flat last fiscal year, with the later segment accounting for all of the growth. The question it seems to me is: can Blyth continue its torrid growth rate, and if not, what is its intrinsic value at a more sustainable but lower growth rate (and what that growth rate might be).

Price Information

Recent Price $25.00
52 Week High $33.88
52 Week Low $21.06

Per Share Data

EPS $1.68
Dividend $0.20
Yield 0.86%
Sales $1.2 Billion
Book Value $8.96

Valuation Ratios

PE Ratio 14
Price/Book 2.60
Price/Sales 0.93
Price/Cash Flow 9.77
LT Debt/Equity 0.40

Profitability and Management Effectiveness

Gross Margin 53%
Operating Margin 12.13%
Net Margin 6.74%
ROE 20.1%

Historical Per Share Data
Year Revs % change Net Income % Change Net Margins
1994 157.5 9.1 5.8%
1995 214.8 13.6% 13.3 46.2% 6.2%
1996 331.3 54.2% 24.0 80.5% 7.2%
1997 495.7 49.6% 40.1 67.1% 8.1%
1998 687.5 38.7% 54.6 36.2% 7.9%
1999 875.1 27.3% 74.5 36.4% 8.5%
2000 1097.5 25.4% 92.4 24.0% 8.4%
2001 1197.2 9.1% 80.7 (12.7%) 6.7%

Historical Share Information

Year EPS Dividends Avg. PE Ratio ROE LT Debt/Equity
1994 $0.21 - - 46.4 .63
1995 $0.32 - 25.1 20.8 .04
1996 $0.55 - 26.3 16.7 .19
1997 $0.86 - 30.6 21.3 .17
1998 $1.10 - 27.4 22.1 .48
1999 $1.50 - 20.0 23.1 .35
2000 $1.89 - 14.8 24.3 .46
2001 $1.69 $0.20 16.3 19.1 .40

DCF Analysis

Owners Earnings = $64.1 million
Growth Rate Assumption = 8-12%
Discount Rate = 9%
Terminal Growth Rate = 5%

Intrinsic Value = $30-42

Other Valuation Measures

EPS * 10 yr. Avg. PE = $38.00
EPS * 10 yr. Low PE = $18.60
Bond Price (eps/.06) = $27.50

Valuation Analysis
Looking at the numbers, what pops out at me is slowdown in revenue growth from last year, and the decline in both earnings and net margins. If you think that the slowdown is a temporary one, and that growth rates and net margins will return to the levels seen in the period between 1997-2000 then this stock is seriously undervalued. If growth rates return to the 20% averaged between 1997-2000 and margins return to the 8% they averaged in that period, then Blyth is worth about $75 a share! I doubt, however, that this will happen. A more likely scenario is a sustainable 12% revenue growth rate and 7% net margins. If this is sustained for a decade and the future PE is a reasonable 15, then the discounted present value of Blyth (using a 9% discount rate) is about $35. A very conservative valuation based on a sustainable 8% growth rate and a 6.5% net margin rate produces a discounted present value of ~$23.

Using owners earnings (calculated as net income + depr&amort, less CapEx) from 2001 as the baseline, I get an intrinsic value of between $30-$42 assuming growth rates of between 8-12% and a 9% discount rate. Two other valuation measures I use are the price given the present eps and the historical average pe ratio, which for Blyth would be $1.68 * 23 or $38 a share, and the "bond price" which is $27.50.

One final note on value, Blyth has a LT Debt to Equity ratio of 0.40. Can they handle the debt load? The answer would appear to be yes. Over the past five years EBIT has covered interest by an average of 14 times. However, this has been deteriorating of late, with EBIT covering interest 13 times in 2000 and 9 times in 2001. It is something to keep an eye on.

In summary, I am having a hard time getting a handle on the intrinsic value of Blyth, but I feel fairly comfortable saying that at present it is trading at a discount. I would put the intrinsic value at anywhere from $30-35 to a hell of a lot more. Using this range, I would suggest that at $25 Blyth is trading at any where from a 17-29% discount to IV. This is not a sufficient margin of safety for those looking for 33%, but it is certainly in the “worth a serious look” range.

Thoughts are greatly appreciated.

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