Chattem Fills Up the Drugstore Aisles

Sometimes you have to wait for a bit of bad news to get a stock at the price you want. I think that is the case with Chattem (CHTT - commentary - Cramer's Take), a leading niche provider of over-the-counter health care products, toiletries and dietary supplements.

Chattem's brands include Pamprin, Gold Bond, Selsun Blue, Dexatrim and Bullfrog. About one-third of its sales are to Wal-Mart (WMT - commentary - Cramer's Take) stores.

Chattem's share price has fallen more than 10% since the company was forced to recall several Icy-Hot Heat Therapy products that were providing too much heat and causing burns. With that episode resolved, I think the lower price represents a buying opportunity.

By focusing on niche market segments outside the core product areas of larger consumer product companies, Chattem has built brand equity and leveraged its distribution capabilities, which has resulted in increased profit margins. The strong brands also allow for multiple brand extensions, such as Gold Bond Restoring, Cortizone Intensive Healing, Icy Hot PM and Aspercreme Heat.

When Johnson & Johnson (JNJ - commentary - Cramer's Take) bought Pfizer's (PFE - commentary - Cramer's Take) consumer products division in 2007, regulators required it to divest certain brands. Chattem swooped in. For $410 million, the company added ACT, an anti-cavity mouthwash/mouth rinse; Unisom, an OTC sleep aid; Cortizone-10, a hydrocortisone anti-itch product; Kaopectate, an anti-diarrhea product; and Balmex, a diaper-rash product. The new products increased Chattem's revenue base by more than a third.

While such acquisition opportunities arise only occasionally, Chattem's focus strategy and brand extensions should allow for strong organic growth as well. For 2009, the company expects organic sales to grow at a high-single-digit rate or higher.

As the acquired JNJ products reached their anniversary this year, Chattem has continued to exceed earnings expectations. For the full-year 2008, analysts have ticked their estimates up slightly, and the consensus for 2009 per-share estimates has risen from $4.47 to $4.54 over the last month.

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At the time of publication, Trent had no positions in the stocks mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.