Yankee Candle: Stocking Stuffer?
In 1969 teenager Mike Kittredge was deciding what he was going to give his mom for Christmas when he made his first candle with melted crayons.Neighbors got word that Mike's candles were to die for, and Yankee Candle (YCC) was born.
While some of Yankee's manufacturing components could come under pressure because of energy costs, we feel that the company's prospects look very strong going forward, but we are initiating coverage on shares with a neutral rating.
Yankee's claim to fame is its sky-high return on equity, which is an unbelievable 70%.
Yankee's brand dominance, homegrown management, and robust balance sheet are other positives.
Short term, however, Yankee's future looks uncertain -- our sources tell us that inventories are shooting up. We're also getting reports that Yankee is repurchasing stock but borrowing money to do so.
Aren't companies supposed to use free cash flow for stock buybacks?
All four analysts that cover Yankee seem to be as torn over the stock as we are -- all four have hold ratings. We think that's because Yankee Candle's earnings growth rate is 17% , which is hardly any higher than that of its peers.
We expect Yankee to hit $1 B in revenues by 2009 -- at 13 X 2006 earnings, Yankee's not expensive by any means. But right now, something smells fishy -- careful with those candles or you might get burned.
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