Description

The case for Blyth Industries can be stated succinctly: it's growing better than 20 per cent a year and the shares trade at about 10 times earnings.
This is a dynamic company. Profits have grown more than 40% per year from fiscal 1996, ended January, to fiscal 1999. Profits were up 29% in fiscal 1999, to $70 million, or $1.42 per share. Revenues have grown 35% per year over the same span. In the latest year, they were up 27%, to $875 million.
Profitability is very good, with operating return on assets of about 30%. (Operating return on assets is defined as operating profit over average operating assets. Operating assets, in turn, are defined as stated assets less cash and acquisition-related intangibles.) The operating margin is about 15%.
Blyth is growing so fast because of a favorable trend for decorative candles, especially fragranced ones, in the U.S. Blyth deserves a lot of the credit for making candles popular. The company sells as much as half of its candles directly, through independent, mostly part-time salespeople, who sell the candles at Tupperware-like parties in people's homes. Blyth has done an excellent job of recruiting and retaining salespeople. The company has progressively broadened its sales coverage throughout the U.S. The U.S. has plenty of untapped growth left in it.
Outside the U.S., there appear to be wide vistas of growth. Hardly anybody in Europe has fragranced candles. Blyth has purchased a major candle company in Sweden and has bought out its minority partners in England. It looks like they're ready to mount a major assault on the European consumer. If they can replicate what they've done in the U.S. over the past decade, this could go from being an exciting story to being a really exciting story.

Here are the blemishes:

The main blemish is that it's difficult to get a handle on why candles are so darned profitable. The other candle company I've looked at, Lancaster Colony, makes even better profit margins than Blyth (although their growth is much slower). When a woman goes into a store, is she determined to buy a Blyth-brand candle, and if so, why? Certainly there's a fad/fashion element to this product. Maybe women will decide one day that they don't want to decorate their living rooms with jasmine-scented candles anymore.
I also don't feel totally comfortable with the direct-sales aspect. Who wants to go to somebody's house and talk about candles for two hours? Obviously, lots of women do.

Barriers to entry are low. There are hundreds of boutique candlemakers out there.

Blyth has an outsized inventory position and SG&A expenses. The company typically carries 4-6 months' worth of candles in inventory. This is because most of their candles are made in the Far East, which adds 1-2 months to the operating cycle. SG&A is a whopping 43% of sales. This is because Blyth pays commissions equal to 25-34% of sales to its salespeople, in line with rates paid at other direct sales organizations.
So there are some elements with which I don't feel completely comfortable. But heck, at 10 times earnings, I can live with it.

Catalyst

Growing earnings. Management is frustrated with the stock price.