Sally Beauty Holdings, Inc.
Sally Beauty Holdings is a retailer and distributor of professional beauty supplies operating through two business units, Sally Beauty Supply (SBS) and Beauty Systems Group (BSG). Sally Beauty Supply targets retail consumers and salon professionals, while Beauty Systems Group exclusively targets salons and salon professionals. Industry peers include Wal-Mart Stores, CVS Health Corporation, and ULTA Salon.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $19.68, with an initial trailing stop set at $19.37. With a current price of $19.67, upward price movement will find resistance at $20.67, with final resistance found at $21.72. Downward price movement will find support at $18.31 and $17.37, with final support found at $16.35.

Average Volume
The average volume number is simply an average of the number of shares traded over a specific period of time, in this case the prior 50 days. The lower the number the greater the volatility the markets can impact on the stock price. For Sally Beauty Holdings the most recent ADV number is 2.294 million shares.

Days to Cover
The most recent days to cover number is 13. The days to cover number is a measure of the company’s outstanding shares that are currently shorted, expressed as the number of days required to close out all the short positions. The number is determined by dividing the number of outstanding shares currently shorted by the average daily volume. The days to cover number is updated twice per month and is sometimes used as a volatility precursor for a stock.

Beta Ratio
The beta ratio is a measure of the systemic risk of ownership of a particular stock as compared to the systemic risk of ownership of the market as a whole as measured against the S&P 500 Index Fund. The higher the beta ratio, the more volatile the stock. For Sally Beauty Holdings the current beta ratio is 1.26.

The Tax Act
It is import that investors understand the potential impacts of the Tax Act since changes mandated by The Act can distort earnings and consequently fair value.

The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

In the case of Sally Beauty Holdings, the company has reported the revaluation of deferred income taxes and the impact of the deemed repatriation on its consolidated financial statements based on provisional amounts. Specifically, in the fiscal year ended September 30, 2018, the company recognized a provisional income tax benefit of $37.7 million in connection with the revaluation of its deferred income tax assets and liabilities, including $2.7 million of benefit related to the adoption of income tax method changes, and a provisional income tax charge of $11.7 million for federal and state income taxes, including $10.6 million payable beyond one year, related to accumulated but undistributed earnings of its foreign operations.

Unrelated Income
Income unrelated to a company’s day to day operation, such as income tax benefits or income from other sources will distort a company’s earnings and consequently its fair value. Investors should always explore the sources of a company’s earnings to better understand potential valuation impacts. For Sally Beauty Holdings none of the company’s operating income came from income tax benefits or from other sources.

Insider Transactions
The SEC classifies insiders as the “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

In the past 12 months, the company has reported 32 insider trades involving 255,383 shares of stock. Of those 32 insider trades, 14 were Buys involving 236,031 shares of stock, and 15 were Sells involving 19,352 shares of stock, creating an insider buy to sell ratio of 12.2 to 1.

Mergers/Acquisitions
In the fiscal year ended September 30, 2018, the company acquired certain assets and business operations of H. Chalut a distributor of beauty products with 21 stores operating in the province of Quebec, Canada, for approximately $8.8 million. In addition, the company completed one immaterial acquisition during the fiscal year 2018 for approximately $0.4 million.

Divestitures/Dispositions
There were no company divestitures or business dispositions during fiscal 2018.

Subsequent Events
There were no company subsequent events after the company’s fiscal year ended but prior to filing its most recent 10-K.

Year-Over-Year Metrics
Several year over year metrics that are of interest to many investors are revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and year to date price growth. For Sally Beauty Holdings, revenue decreased by 0.15%, earnings increased by 31%, free cash flow increased by 12%, debt decreased by 5%, and the stock price decreased by 6%. Year to date the stock price is up 7%.

Anticipated Rate of Return
I calculate the anticipated rated of return for any equity investment by adding the yield of a 10-year treasury to the stock specific beta and then multiplying the result by my equity risk premium. The equity risk premium is the excess return I want to receive for investing in an equity as opposed to a risk free investment such as a treasury. The higher the number, the better. My anticipated rate of return for Sally Beauty Holdings is 3.87%.

Future Value
My future (5 year hold) target price for the stock is $17, which is an average annual return of (2)%. A prior five year hold of the stock (FY2014- FY2018) would have returned an average of (30)% per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value
As an on-going concern, my current baseline valuation for the company is $19. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value estimate for the stock is $29. The fair value estimate is my current valuation for a stock based on earnings, earnings growth, and the current 5-year yield of a AAA rated corporate bond. Value investing initiate, reduce, and terminate targets are derivatives of fair value.

Other Value Considerations
Other value considerations include the PE Ratio, the PEG Ratio, Return on Assets, Return on Equity, Return on Capital Employed, Return on Invested Capital, Cash Flow From Invested Capital, and Tangible Book Value. For Sally Beauty Holdings, the PE Ratio is 8, the PEG Ratio is (3.6), the Return on Assets is 13.9%, the Return on Equity is (109)%, the Return on Capital Employed is 19.4%, the Cash Flow From Invested Capital is 33.1%, and the Tangible Book Value is $(7.30).

Fair Warning
Fair warning means that the time for bidding has ended and an exchange is about to be concluded. Sally Beauty Holdings, Inc. (NYSE: SBH) – FYE 09/2018 – UNDER VALUED The stock is currently trading at levels below my $29 initiate target. Please See Linked PDF Worksheet

Financial Data
Financial data used in this report was taken from the most recent SEC 10-K filing as reported to the U.S. Securities and Exchange Commission on 11/14/2018 at 16:02:39 HRS.

Disclosure
I hold no shares of Sally Beauty Holdings

Disclaimer
I am not a licensed or registered investment professional, nor am I qualified to provide investment advice. As such, always consult a licensed and registered professional investment advisor before investing any money.
Copyright © 2018 Wax Ink
Posted on 11/22/18