SHOULD

think about changing its stock's symbol to P-E-E-W. Shares of the New York-based marketer of fragrances like Celine, Paul Smith and Burberry have posted a funky 37% decline over the past year.

But sales for the company during that time gave little cause for investors to wrinkle their noses. Fourth-quarter revenue, reported Jan. 18, jumped 29% year-over-year to $63.4 million. That put full-year sales at $235.6 million, up 27% and ahead of Inter Parfums' own guidance of $228 million.

Profits, though, have been less abundant. Management has yet to set a date for its 2004 earnings announcement (barring delays, it'll probably report in early to mid-February). But they've previously guided toward 77 cents a share for the full year, where Reuters Research's three-analyst consensus now stands. That would make for a lackluster 12% improvement over 2003. And on Nov. 29 management guided toward 2005 profits of, again, 77 cents flat vs. 2004 thanks to a doubling in Burberry royalties.

The outlook for Inter Parfums, however, may not be as bleak as those numbers suggest. The stock's sharp decline, in fact, may offer a rather sweet-smelling opportunity for bargain hunters willing to think for a moment like merger-and-acquisition analysts. Inter Parfums turned up recently on our Takeover Targets screen.

"Sirius Satellite Radio to buy Inter Parfums!") let's state one thing plainly: We're aware of no evidence or informed speculation over a suitor for the company. And besides, the ownership structure of Inter Parfums its chief executive and president own 58% of outstanding shares, and an investment subsidiary of Louis Vuitton, another 18% makes such a thing highly unlikely. We use the name Takeover Targets to describe this value screen, though, because it relies on a measure that's often used to analyze such scenarios: the EV/Ebitda ratio.

EV stand for enterprise value, or a company's market value (share price times number of shares outstanding), plus its debt, less its cash. It's the price you would pay to buy a company in full, and pay off everything it owes, using what's in its till. Ebitda is earnings before interest, taxes, depreciation and amortization. The income measure is commonly used for M&A work because it backs out things that have to do with interest and tax rates, which often change after a takeover, and because it also ignores depreciation and amortization, accounting entries which pertain to past activities rather than current operations.

We say, then, that you can think of EV/Ebitda as the takeover-price/money-being-made-right-now ratio. But don't use the measure to try to predict buyouts; it's too difficult, and not all buyouts bring premiums for stockholders. Rather, use our Takeover Targets screen to get a better sense than investors who just use price/earnings ratios of which companies' shares are due for a lift.

We featured food wholesaler Smart & Final, for example, in our last such search on Dec. 14 ("More Takeover Targets. Its shares have since served up a quick 10% gain, compared with a 2% decline for the S&P 500 index.

Use our Stock Screener and the recipe to the right to run our screen for yourself anytime. Recently it produced a list of 11 companies, including Inter Parfums.

On Oct. 12 Inter Parfums signed a 12 1/2 year deal with Burberry, replacing a previous license, set to expire at the end of 2006, which had been in place since 1993. The new license is extendable by five years if both parties agree before it expires, but Burberry can also buy it out at fair market value at the end of 2009 or 2011. The new royalty rate is double the old one. (The new rate has been in effect, though, since July.) And Inter Parfums must increase its marketing spending, starting at the beginning of 2005.

Paul Smith Extreme Woman

"The transparent gaiety of freesia harmoniously blends with the sparkling vibration of Italian mandarin, enhanced by a surprising sensation of crushed leaves produced by..." You get the idea.

The company will pass part of the increased costs along by raising prices. But it also plans to begin acting as its own distributor for Burberry products in late 2006. That alone could boost sales significantly; distributors mark up fragrances as much as 100%, according to Oppenheimer analyst Sharyn Uy. She figures that Inter Parfums' Burberry sales will total $159 million in 2005, and will climb to $180 million in 2006, while bringing improved margins.

"We believe the expected increase in the gross margin due to the realization of higher selling prices could more than offset potentially higher costs associated with establishing direct distribution this would result in a higher operating margin for Inter Parfums' Burberry business," wrote Uy in a Jan. 21 research note. Inter Parfums' present operating margin of 14% is second only to Avon Products among cosmetics and fragrance companies.

The company also has plans to reduce its dependency on Burberry. Analysts say management is actively searching for potential acquisitions, and has a reputation for frugality. In June Inter Parfums paid $19.2 million in cash for a 15-year license to develop and distribute fragrances for chichi Paris-based fashion designer Lanvin. That should add $25 million in annual sales, say analysts, putting Parfums' cost at a mere 0.8 times sales.

Inter Parfums should have sufficient funds to fuel its growth designs. It's net debt free with about $27 million in debt and $35 million in cash. Oppenheimer's Uy figures that free cash flow essentially, cash left over after the bills are paid and investments are made went into the negative by $4 million in 2004, but should swing to a positive $8 million in 2005 and $15 million in 2006.

How expensive are shares? They trade now at an EV/Ebitda ratio of 9.4. That's far lower than Avon's 14.9 and Estee Lauder's 12.4, and slightly lower than Elizabeth Arden's 10.0. (See our July 15, 2004, price/sales screen "Oops, I Dabbed It Again Those numbers should have value investors smelling opportunity.