Under the Radar: Gold Bond Maker Thrives

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Consumer retrenchment is here to stay.

Retail sales rose an estimated 0.6% in June after a 0.5% gain in May. And the national savings rate just hit 6.9%, the highest since 1993. Here's a small-cap consumer-staples company that profits from thrift.

Chattem(CHTT) makes over-the-counter health care products, toiletries and dietary supplements. The company was founded in 1879 as the Chattanooga Medicine Co. Its first product was a laxative called Black Draught.

Today, Chattem boasts a lineup of indispensable household items, including Gold Bond, Bull Frog and Icy Hot. And its fundamentals compare favorably to twice-named rivals Church & Dwight(CHD) and Procter & Gamble(PG). Chattem's second-quarter operating margin widened to 36% and the net margin stretched to 20%. By comparison, Procter & Gamble and Church & Dwight each posted quarterly operating margins near 20% and net margins under 14%.

Chattem's second-quarter revenue ascended 4.4% to $122 million as net income climbed 17% to $24 million and earnings per share increased 19% to $1.26, marking a 10-quarter streak of earnings growth. Domestic sales improved 7%, offsetting a 23% decline in international sales, which was caused by unfavorable currency rates and weaker foreign demand.

The cash balance has more than doubled since last year's second quarter to $29 million. And a quick ratio of 1.9 indicates ample liquidity. However, a $409 million debt load and $5.3 million of quarterly interest expenses are ongoing weaknesses. TheStreet.com Ratings gives Chattem a financial-strength score of 6.43 out of 10, below the "buy"-list average of 7.

Chattem's stock has declined 10% in 2009, underperforming the Dow Jones Industrial Average and the S&P 500. The stock trades at a high price-to-earnings ratio of 17, but is fairly valued when considering its 2010 price-to-earnings ratio of 13. The company doesn't pay dividends, has a market capitalization of around $1.2 billion and a low beta, a measure of stock-market correlation, of 0.3.

TheStreet.com Ratings gives Chattem a "buy" recommendation.

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