This column is for investors willing to take more risk and potentially receive more reward.  The stocks mentioned in this column are not recommended to buy or sell.  They're brought to your attention so you can investigate them further to determine if they fit your risk profile.  Most of the stocks will have less than $1 billion of market capitalization, have more volatility than other stocks, and oftentimes no earnings.  And some will have tremendous stories.

October 8, 2010 - Sally Beauty Holdings (SBH-NYSE) together with its subsidiaries, engages in the distribution and retail of professional beauty supplies. The company operates in two segments, Sally Beauty Supply and Beauty Systems Group.

The Beauty Systems Group distributes beauty supplies directly to salons and salon professionals through its sales force and professional-only stores. Its stores, branded as CosmoProf or Armstrong McCall, and its outside sales consultants sell approximately 9,800 professionally branded products, including Paul Mitchell, Wella, Sebastian, Goldwell, and TIGI that are targeted exclusively for professional and salon use, and resale to their customers. This division operated 829 company-operated stores and supplied 162 franchised stores.

The company serves customers primarily in the United States, Puerto Rico, Belgium, Canada, Chile, Mexico, and the United Kingdom. Sally Beauty Holdings Inc. was founded in 1964 and is headquartered in Denton, Texas.

The latest move by Sally was to buy a competitor, Aerial Co. Inc., for $70 million. Aerial is big in the Midwest, a region where Sally doesn't have a strong presence. The new purchase will grow Sally's distribution channels in the region. It adds about 700 employees and $100 million in sales. News of the acquisition (on October 4) moved the stock higher to $11.40 a share, close to its all-time high of $11.72, set recently. After the news, an analyst at Caris & Co. raised the price target for the stock to $13.50 a share.

The company was already posting solid results. Sales were $743 million in the third quarter (fiscal year ended in September), a 10% increase from the same period last year. That improvement was the result of strong same-store sales, acquisitions, and new store openings. In the three month period, the company opened 33 new locations, taking its total to almost 4000. Management wants to open more, believing it's the best way to gain market share. It particularly likes the expansion possibilities in Mexico and Canada.

Operating margins are widening as the company sees better sales for higher margin products at the retail level in the United Kingdom. To help fatten profitability, management is cutting costs such as lower priced raw materials and developing better warehouse efficiencies. Operating margin finished the most recent quarter at 14%.

One red flag for Sally is debt. There's $1.6 billion of it. While interest earned is 1.8 times covered, management is trimming debt by retiring part of it or refinancing. The latter should help margins as new obligations are at lower interest rates than current ones.

More numbers: Market cap is $2.05 billion. Trailing P/E is 16 while Forward P/E is 12.75. Price to sales ratio is .73. Operating margin for the last 12 months was 11.4% while profit margin was 4.53%. Return on assets was 13.59%. Book value is still negative at $2.89 a share but well above the negative $4.21 a share in 2007. Revenues for the last 12 months was $2.84 billion. There's cash of $28.03 million or 16 cents a share. Current ratio is 1.88. Beta is a high 1.96. In the last year, the stock is up 55.92% compared to the S&P 500 index which was up 9.68%. There are 182.39 million shares outstanding but a Float of 89.95 million. Insiders own 50.54% of the stock while Institutions have 52.10% of the Float. There's currently a large short position of 13.77 million or about 19 days worth of trading. There is no dividend.

Aggressive investors will find this stock attractive because it has high volatility, good earnings momentum, and a price chart that shows a stock that moved up strongly in the last 18 months. But keep in mind the high debt load and the negative book value. This stock could take a breather any time earnings miss estimates. Investors already love the stock and have pushed it to new highs. They expect the good news to keep coming.
If it doesn't, the love could turn cold, fast.

- Company Web site: www.sallybeautyholdings.com

- Ted Allrich