On another related note, I don’t get why PBH has always been a favourite of yours. The last 12 months data shows net debt of $2.02B, EBITDA of $288M and FCF is $26.7M (ltm numbers) for ratios of 7.04x for net debt/ebitda and 75.7x debt/fcf. Please explain the disconnect as the numbers show the balance sheet extremely!! stretched.
Thanks
We prefer Net Debt/EBITDA to assess a company’s debt position, as FCF can fluctuate quarter-over-quarter. Each industry could have a different leverage profile due to a variety of factors such as predictability, competitive position, and disruptive risks. Real estate and utility usually involve a heavy debt load, for example. For a stable industry such as the utility industry, we are comfortable with net debt/EBITDA below 6.0x, while with most other industries, we prefer a net debt/EBITDA below 3.0x. We also look at EBIT/Interest expense, or long-term debt/equity (mostly for financial companies).
According to the company’s MD&A here, page 13, PBH currently has a net debt of $2.028B, and a net debt/adjusted EBITDA of 4.4x, which is temporarily above the target level of 3.5x -4.0x, mainly because of working capital and investment in capital projects. FCF was weak in recent quarters as the company reinvested into capital expenditure to expand capacity which we think is a good thing for long-term growth. However, the maintenance capital expenditure is actually just $49M (on page 18 of the MD&A). We think PBH’s underlying business is capital-light, the debt may appear high due to reinvestment, which we think should come down in future quarters as EBITDA grows. In addition, we like PBH as a stable, predictable consumer staple name that continues to reinvest for growth. We are comfortable holding PBH here. Though the past of course doesn't guarantee the future, we note that PBH is also up nearly 6-fold in the past 10 years. EPS has gone from $0.99 to an expected $5.61 (2024) in that time