Urban Outfitters (URBN)

mallscene

Key Statistics

Enterprise Value = $2.488 billion

Operating Income = $381 million

EV/Operating Income = 6.53x

Price/Revenue = .81x

Earnings Yield = 9.2%

Debt/Equity = 0%

The Company

Urban Outfitters is a Philadelphia based global retail company. They opened their first store in Philadelphia around the University of Pennsylvania in 1970. Since those origins, it has grown into a massive global company with 613 locations. While they are a global company, about 87% of sales originate in the US.

They currently operate a few crucial divisions. Urban Outfitters itself includes 245 stores. Urban Outfitters is an apparel retailer targeting the 18-28 year old demographic. Anthropologie represents 226 stores and 41% of sales. Anthropologie targets women aged 28 to 48. They also operate a food & beverage business focused on pizza & casual dining bought through an acquisition.

Another segment is their Free People brand,  which sells clothes and accessories to women aged 25 5o 30. Their brands are also sold in department stores like Nordstrom and Macy’s.

Urban Outfitters is cheap because of their mall locations, their connection to department stores like Nordstrom and Macy’s, and pressure in recent years on the margins. Trade jitters and late 2018 recession worries also took the stock down late last year. It peaked at $48 in September 2018 and has plummeted down to $29.59. An increase to those levels would be a 62% increase from current levels.

My Take

There isn’t much to dislike about this company. If all you knew were that this was a mall retailer and then took a look at the stock chart, you’d assume this is just another retail trainwreck.

Look closer.

This is a company that has grown sales steadily and robustly by 103% since 2010. They earn a robust return on equity for a retail company, making 21.36%. They are in impeccable financial condition. They have zero long term debt and boast $5.88 in cash per share against a price of $29.59. They are a popular brand with a loyal, niche following. They are buying back shares to a tune of 2.96% per year. F-Score is a 7/9.

This is a fast growing, financially healthy company, boasting respectable returns on capital. That’s the reality. From Mr. Market’s perspective, all that Wall Street sees is “mall retailer,” and it’s priced like it’s roadkill. In fact, the current price is around 2011 levels, when they were earning 47% less and had sales that were 57% of what they are today. Despite all of the company’s growth and tremendous success over the last decade, the stock has been stuck in a trading range for that entire time period, ignored by the market because it’s lumped in with all of the other retail carnage.

URBN’s current P/E of 10.88 compares to a 5-year average of 19.66 and an industry average of 17.89. On an enterprise multiple basis, the current 6.53x multiple compares to a 5 year average of 10.28x. An increase to this level would be a 57% increase in the stock price. At a minimum, I think the stock could return to $45/share.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Winnebago (WGO)

rv

Key Statistics

Enterprise Value = $1.25 billion

Operating Income = $162 million

EV/Operating Income = 7.71x

Price/Revenue = .49x

Earnings Yield = 10.59%

Debt/Equity = 51%

The Company

Winnebago is an iconic, all-American brand. When you think of RV’s, you think of Winnebago. Winnebago is to RV’s what Harley-Davidson is to motorcycles. Winnebago manufactures two kinds of RV’s: towable (55.9% of sales) and motorhomes (42.7% of sales). Towables are RV’s that can be towed with a truck. Motorhomes do not need to be towed, and the RV itself can be driven. Within the motorhome segment, there is wide dispersion in price depending on what features the buyer wants. A new Winnebago motorhome can range in price anywhere from $80k to $250k.

Winnebago’s business has performed excellently throughout this economic expansion. Sales and earnings have steadily increased without a hiccup. Sales were $212 million in 2009 and have grown steadily every year to $2 billion in 2018. Earnings have gone from a loss of $2.71 in 2009 to a gain of $3.22 in 2018.

Despite the consistently improving results, sentiment against the stock in the last year has been negative. An increase to the 52-week high would be a 51% increase from current levels. The poor stock performance is occurring over trade jitters and concerns that the US might be at a cyclical peak and about to enter a recession.

This is a valid concern. Winnebago was annihilated in the last recession, with the stock falling over 80% from the 2007 peak to the 2009 low. The reasons behind this are obvious. Winnebagos are a massive, discretionary expense. Winnebagos are for fun. No one needs a Winnebago and recessions have a way of clarifying the difference between a want and a need. People are only going to buy them if they are doing well economically and feel good about their jobs. In a recession, sales for brand new Winnebago’s are going to fall dramatically.

My Take

I feel a bit dumb at the moment after purchasing this. After I bought this stock, Thor (another RV manufacturer) reported abysmal results and I sold the stock. Additionally, my entire thesis is that the US is not entering a recession. Friday’s lousy jobs report casts doubt on my hypothesis.

With that said, I am sticking with it. I still think that the US economic expansion is intact. I think that the bad jobs reports was only a temporary blip driven by the government shutdown. The two indicators I care the most about, the spreads between both the 2 and 10-year bonds and the spread between the 10-year and 30-year, don’t show signs that the Fed is too tight. Additionally, the Fed has been signaling that they are not going to allow the economy to fall into a recession. Like it or not, whether or not we go into a recession is mostly driven by one institution, and that’s the Federal Reserve. You can complain and shake your fists at this all you want, but that’s the world that we live in.

In terms of Winnebago itself, I think that the long term secular trends favor this industry. As baby boomers retire, they are going to purchase more Winnebagos. RVs also have an appeal to the burgeoning population of people that want to live on the road. I also think that gas prices are going to be constrained due to the fracking industry in the United States. While I believe prices will probably rise slightly in the short term, the existence of the fracking industry prevents them from getting extraordinarily high as happened in 2007 and 2008.

There are many assumptions buried in my analysis so I will be observing this position carefully. With that said, I think investors are being paid for the uncertainty. The P/E of 9.44 compares to a 5-year average of 15. An increase back to these levels would be a 50% appreciation. They are also in excellent financial health. The Z-Score of 5.04 implies an extraordinarily low probability of bankruptcy. The F-Score is nearly a perfect of 8 out of 9. This is a cheap stock in a solid financial position and, as long as we avoid a recession in the near term, it should outperform the market. We shall see.

 Random

Fun movie: Sneakers, 1992. “I want a Winnebago.”

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Express (EXPR)

mall

Key Statistics

Enterprise Value = $239.42 million

Operating Income = $57.54 million

EV/Operating Income = 4.16x

Price/Revenue = .16x

Earnings Yield = 10.64%

Debt/Equity = 10%

The Company

Express is a mall apparel retailer and is hated. It is down 81% from its all-time highs and down 63% from its 52-week high. It was hammered particularly hard during the November/December tantrum. Unlike most stocks, it didn’t recover from that. The CEO also stepped down in January.

Sales and earnings have been steadily declining for the last few years, which has led to an extremely negative reaction in the stock. Earnings have fallen from $1.38 in 2016 to $.25 in 2018.

Express’s target market is 20-30 year old men and women. Categories cover casual wear and work wear. It has established a niche in this area. They currently operate 635 stores, including 145 outlet stores. They design their own clothes, which also adds to their unique niche.

My Take

The expectations embedded in the price indicate that most investors expect this company to die. The question I try to answer when looking at situations is simple: will this company be a going concern in 5 years?

Looking at Express, I think this company will continue to exist in 5 years and will continue to be profitable. They are pursuing some initiatives to transform the current climate and sustain themselves while mall retail is decline. I think their niche focus on 20-somethings is critical here. When we think about the retail establishments that will survive, I believe that generic retail establishments that try to sell products to everyone are going to have a tougher time than retail establishments with a consistent, loyal niche. Retailers that have established themselves with a unique niche that inspires customer loyalty are likely to survive the shakeout. Express is doing this by laser focusing on young people and designing their own unique clothes.

Express is also taking steps to combat the decline of mall retail. They now offer ship-from-store, allowing their customers to order clothing directly from a nearby store and have it shipped to them. This entrenches its online brand and fights against declining mall traffic. Currently, online orders represent 24% of total sales for Express, and this is increasing.

As they expand their online presence, Express also shows a willingness to close underperforming stores when leases expire. This is a sharp contrast to the Francesca’s debacle I invested in over a year ago, a company which was opening new stores even as their existing chains struggled. Express, in contrast, closed stores and is moving them from malls to more traffic-friendly outlet locations. In 2017, they closed 45 mall locations and opened 24 outlet locations.

The financial position of Express also increases the odds that the turnaround strategy will eventually yield results. Currently, they have an extremely low debt to equity ratio of 10%. The F-Score of 8 also represents an extremely high degree of financial quality. The Z-Score is also 3.44, meaning that the company has an extremely low bankrtupcy risk. This strong financial position gives Express something critical: time. They have the time to weather the storm while other, less well-positioned retailers, are wiped out.

Investors are getting paid for the uncertainty. The P/E of 9.4 compares to an industry average of 17.10. In the last 5 years, the average P/E for Express has been 19. On a price/sales basis, the current ratio of .16 compares to an industry average of .5. On an enterprise multiple basis, the current value of 4.16x compares to a 5-year average of 6.9.

Overall, Express is a troubled retailer with an uncertain future. However, I think that investors are being paid for the uncertainty because the consensus expectation is that Express will not survive at all. Meanwhile, management is aggressively pursuing a turnaround strategy. If the plan actually works, Express should trade at a significantly higher multiple in the future. Trading at half of book value and around double cash value, I think this limits the risks on the downside.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

Hollyfrontier (HFC)

refine

Key Statistics

Enterprise Value = $10.752 billion

Operating Income = $1.642 billion

EV/Operating Income = 6.54x

Price/Revenue = .51x

Earnings Yield = 12%

Debt/Equity = 41%

The Company

Hollyfrontier is a U.S. oil refiner. They refine oil into gasoline, diesel fuel, jet fuel, asphalt, lubricants, etc. They operate 5 refineries and process 457,000 barrels of oil a day. They are headquartered in Dallas, have been operating since 1947, and operate mostly in U.S. red states.

My Take

Hollyfrontier has done extraordinarily well over the last three years. The refining business has been good and the stock is up over 125% from its lows reached in 2016. The current cheapness is mostly a result of how well the business has performed and recent price declines. The stock is down 35% from its high in June 2018. A bulk of this downturn happened late last year, when markets paniced because everyone thought the Fed was going to push the economy into a recession and, also, because everyone is crazy and overreacts.

The biggest risk to Hollyfrontier is dramatic fluctuations in price of oil. Hollyfrontier makes money through the price spread between refined products and the oil itself. Those prices are largely unpredictable. Hollyfrontier can’t control what happens to prices. This uncertainty with oil prices is a key cause of the cheap valuation. When Hollyfrontier encounters good times, for instance, the market doesn’t have any confidence that the good times will last.

Another significant risk to Hollyfrontier is the risk of a recession, which will hurt demand for refined products. As I’ve stated many times before on this blog, I don’t think we are having a recession in the next year. Of course, the caveat here is that’s just like my opinion, man.

Hollyfrontier focuses on factors that they can control, not the price of oil. To control price fluctuations in their raw materials, they purchase derivative contracts to protect themselves against adverse price fluctuations. They are also focused on expanding their footprint and continuing to grow the business through expansion and strategic purchases of other businesses.

Hollyfrontier’s July 2018 purchase of Red Giant Oil in July is a good example of their acquisition strategy. Red Giant Oil was a small family-owned business. Red Giant produces an EBITDA of about $7.5 million. Hollyfrontier paid a reasonable price: $54.2 million, or a multiple of 7.23x. This demonstrates that while management is committed to expansion, it is not in the style of shareholder value destroying “empire building” expansion. They are pursuing acquisitions that help them strategically and are doing so at reasonable prices.

Over time, Hollyfrontier will continue to grow through acquisitions and organic growth of the business. Demand for refined products is never going away and even though the prices are volatile, over the long run Hollyfrontier should do well and continue to grow earnings and cash flow.

From a relative valuation standpoint, Hollyfrontier’s P/E is currently at 8.42 compares to an industry average of 12.87. On a price/sales basis, the current .51x multiple compares to an industry average of 1.8x. A rise to the average levels for the industry would be a significant price increase from the current multiple.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.

I am a value investor. My outlook is inspired by the ideas of Benjamin Graham. This site is a real time chronicle of my portfolio and an outlet to share my ideas. I hope you enjoy.