Q&A: Finding Value With Robert Olstein

We sometimes buy companies with bad management, if that fact is more than accounted for in the price. At a cheap-enough price on a decent business, I'm willing to ride out any problems until somebody, if not current management, figures out how to turn things around.

Isn't a management change what attracted you to Playtex?

Yes. What originally attracted us to Playtex (PYX Quote) was their hiring of Neil DeFeo as CEO in late 2004. DeFeo was successful in turning around and selling Remington Products, and he has an excellent record in the consumer products industry. That was the "heat": we knew who he was and his track record.

When he came in, he talked about being able to take out $35 million-$40 million in costs, about better managing their brand franchises, about how the lack of sales growth was inconsistent with the opportunity. When he started following up with action -- signing licensing agreements to add to the brands, selling the Woolite product line -- we started looking more closely.

Tell us a bit more about the company.

Playtex is a consumer-products company with what we consider to be excellent secondary brands like Wet Ones, Playtex and Banana Boat. Many of the brands are under the radar screen, which we like to see from a competitive standpoint. They operate mostly in the infant, feminine care and sun care areas.

The thesis is pretty straightforward. The plan is to introduce new products, sell nonstrategic assets, reduce infrastructure and pay down debt -- which we believe will result in higher margins and additional free cash flow.

The key for the stock will be growth. They're going to have to spend to grow revenues, but they should have the money to spend from cutting costs elsewhere and further asset sales. If they can grow sales even 2%-3%, there's big upside in the share price.

If costs are down, the leverage from increased sales would likely be significant.

Exactly. With only 2%-3% top-line growth, we think after-tax margins can go from 4% to 8%, and the earnings power is closer to $1.25 a share.

Consumer products companies growing in the 2%-3% range sell for 17-18 times earnings. So if they can make it work, it's not a stretch to see Playtex going to $20. The way we look at it, with the proper financial metrics we have time to find out whether this guy can do what he says he can do. We think they're only in the second or third inning of a nine-inning ballgame.