Jacuzzi Should Heat Up

We believe the rest of Jacuzzi's detractors are wrongfully dismissing the company's improved business structure. President/COO Don Devine, who came aboard in 2002, has spent the past three years cutting operating costs and paying down debt. The company's debt stood at $447 million (163% of common equity) at the end of fiscal 2004, down from $1.23 billion (616% of equity) at the end of 2001.

Jacuzzi funded these repurchases by selling off some businesses in the last few years that helped it exit the swimming pool, water systems and lighting businesses. The company sold a $109 million stake in a manufacturing company to JP Morgan's private-equity group in 2002. And in 2001 the company took in $165 million in cash for its stake in manufacturing concern Amex True Temper.

The company's quality of earnings is an issue that could keep the earnings multiple constrained, because currency-related gains aren't sustainable, but we believe there is upside to the current estimates, and investors with longer-term horizons should focus more on Jacuzzi's solid top-line growth, debt reduction and improved year-over-year operating margins.

As successful as Jacuzzi's restructuring has been, the company's executive suite will experience some changes in October 2005 when current CEO David Clarke steps down after 10 years of service. Even so, we believe the transition period will be relatively smooth, because Devine, who's orchestrated much of Jacuzzi's recent turnaround over the past two years, will step into the chief executive role.

We believe Jacuzzi's shares, thanks to the December decline, are poised to turn in some nice results in 2005. Jacuzzi scores well in our Alpha factor, which determines a stock's ability to make large percentage gains on news. There are only 73 million shares outstanding, but we believe continued strength in the housing sector will lead to increased institutional interest in beneficiaries like Jacuzzi that have not participated fully in the upside of the housing move. When all is said and done, we expect Jacuzzi to trade in the double digits.

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