8 Stocks for Seekers of Small-Cap Values

Perfume seems like it would be extraordinarily profitable to make. The scents come largely from plant sources like resins, oils and leaves, or else from chemists. Sometimes a leathery fragrance calls for castoreum, which is secreted from a beaver's rear, but a little goes a long way. (Don't tell cigarette smokers that the same stuff helps make each puff so flavor-filled.) Only 5% or so of cologne and perhaps 20% of perfume consist of aromatic compounds. (The names, in fact, denote the strength of the scent, and not the intended gender of the wearer.) The rest is usually water and ethanol, the same stuff we make from corn and add to gasoline.

Yet even prosperous fragrance makers don't make as much as you might think. Inter Parfums (IPAR), which churns out fragrances under names like Burberry, Paul Smith and Gap, pays around 41 cents on the dollar to manufacture and package its goods and another 46 cents to market them and pay corporate overhead. Take out for taxes and interest and there isn't much left -- about five cents on the dollar.

That's enough for now, since Inter Parfums is a relatively small company, valued at just over $400 million, and since its income, while modest, is growing nicely. This year the company's sales are on pace to increase 20%. Per-share profits are expected to increase 17%. I recommended the stock in January 2005 after it turned up on a search for promising small companies. It's up 30% since, compared with a 6% increase for the S&P 500 index.

It might have gained more, except that investors are largely shunning luxury goods sellers, worrying that they'll suffer more than companies that sell necessities in the event of a long economic slowdown. Inter Parfums' stock price works out to less than 15 times the current-year earnings forecast, down from 20 at the time of my earlier recommendation. The modest valuation helped earn the company a spot recently on a small-cap value screen, which searched among companies valued at less than $1 billion for healthy sales and earnings growth and price/earnings ratios that are below their industry medians. Have a look at all eight screen survivors on the next page if you like, or run the search yourself using SmartMoney's stock screener.

Inter Parfums' strength seems owed to the popularity of its brands and an ongoing Euro-American scent exchange. Burberry, a London brand, is selling well in the U.S. while Gap, licensed from the San Francisco clothing seller, is seeing strong demand in Europe. Customers seem keen, too, on a recently launched version of Burberry called The Beat. Second-half launches should include updates to the company's Lanvin and Van Cleef & Arpels lines, a new Brooks Brothers fragrance and a cosmetics line for women's clothier bebe Stores.

All told, I still smell opportunity in Inter Parfums shares. They come with a modest dividend yield of 1%. Lately the company has spent slightly more on share repurchases than dividends. Another promising sign: Reported earnings have topped estimates for three quarters running, each by a double-digit percentage.