Category Archives: Company Analysis

Preformed Line Products Company (PLPC)

power

Key Statistics

Enterprise Value = $268.74 million

Operating Income = $29.68 million

EV/Operating Income = 9.05x

Price/Revenue = .6x

Earnings Yield = 9%

Debt/Equity = 25%

The Company

Preformed was founded in 1947 by Thomas F. Peterson, who held several patents for “armor rods,” which protect electrical conductors in overhead power lines. The product was a success, and the company grew significantly. Over the years, the company expanded into several other products involved in cable and power transmission, including fiber optics.

Demand comes from the construction of new power lines, power equipment, telecommunications infrastructure, data communication. Their products can be used to repair and revitalize aging power infrastructure. Their products can also prevent the loss of energy in a power line, helping save the end customers money.

The business is divided up into three main areas:

  • Energy products – 69% of the company’s revenue. This is the core of the company’s business and ties back into the company’s heritage of armor rods. They are referred to mainly as “formed wire products.”
  • Communications products – 21% of the company’s revenue. Preformed’s products protect communication lines (like copper cables and fiber optics) from environmental hazards.
  • Special industries products – 10% of the company’s revenue, mainly involving data hardware

My Take

Preformed’s customers are mainly electric utilities, cable operators, and renewable energy companies.

I think it’s possible that we’re headed for a recession, so I like that this company’s business, while cyclical, should still do alright even if we face a recession. Power grids need maintenance, cable networks need maintanence, and it’s not something that is simple discretionary spending that will be slashed in a recession. The resiliency of the business is evident in the company’s history of results. Even in the depths of the recession, in 2009, the company still made $4.35 per share.

PLPC also has the opportunity to benefit from global economic growth. Products are sold around the world. As the global economy grows, demand for electricity and telecommunications services will grow. This increases demand for PLPC products. Meanwhile, in the United States, the electrical and telecommunications grid will require constant maintenance and spending, creating a steady demand for Preformed’s products. If Trump and the Democrats can cut an infrastructure deal (I know, but stranger things have happened), that would also benefit Preformed.

The balance sheet is in a strong position. Against the current price of $51.17, $9.05 in cash. The debt/equity ratio is 18%. With an Altman Z-Score of 3.9, bankruptcy risk is very low.

Meanwhile, Preformed’s current price is compelling. The P/E is 11, and the 5-year average is 21. The EV/EBIT multiple is 9, and PLPC typically trades around 13. An increase to this level would be a 44% increase from current levels. The stock currently trades for 60% of sales, which is where it was in the depths of early 2009 market collapse. Preformed also trades near book value, which has marked similar nadirs in the stock price.

Overall, I think Preformed is currently a business that should stay resilient in a recession with strong growth prospects. At a compelling price relative to its history, I think it is a good addition to my portfolio.

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.

Schnitzer Steel (SCHN)

metal

Key Statistics

Enterprise Value = $749.09 million

Operating Income = $127.88 million

EV/Operating Income = 5.85x

Price/Revenue = .26x

Earnings Yield = 20%

Debt/Equity = 23%

The Company

Schnitzer Steel was established in 1906 as a scrap metal business by Sam Schnitzer. It has expanded to become one of the biggest recyclers of scrap metal in North America. Schnitzer acquires scrap metal via scrap cars, rail cars, appliances. Scrap metal is the raw input into electric arc furnaces. They currently operate 23 scrap metal facilities in the United States.

Schnitzer also produces finished steel products such as rebar, wire rod, coiled rebar, merchant bar, and other specialty products.

My Take

The steel industry has been under pressure all year. With increasing steel tariffs, customers globally were in a rush early in 2018 to acquire steel in anticipation of the tariffs. Prices rose, benefitting the steel industry, and their subsequent decline has seriously hurt the industry. Making matters worse, recession jitters entered the picture, further hammering all of these stocks and sending them all into deep value territory. The market, in turn, has overreacted to what looks like a slight decline in steel prices.

steel

Schnitzer, in particular, is affected by the steel tariffs in the US and abroad because their revenue is global. North America sales represent 39% of their business, and the rest is sold throughout the globe.

I don’t talk about price-to-book much, but I think it’s worth discussing for an extremely cyclical stock like Schnitzer.  Schnitzer currently trades at 93% of book value. This is the same valuation that the company previously had in the depths of 2009. It was around the same valuation at the trough of steel prices in 2016. This looks to me like an overreaction and a mispriced security.

Schnitzer trades at a discount to its peers and its history. At 26% of sales and .93x book value, the company currently trades near the trough of steel prices, which occurred in 2016. This seems like a significant overreaction to a slight recent decline in prices since mid-2018. The current P/E is 5, and the forward P/E is 13. As recently as 2017, the P/E was 20.

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.

ArcBest (ARCB)

truck

Key Statistics

Enterprise Value = $746.83 million

Operating Income = $142.67 million

EV/Operating Income = 5.23x

Price/Revenue = .22x

Earnings Yield = 9%

Debt/Equity = 42%

The Company

ArcBest is a logistics company that is split up into two segments: asset heavy (mainly shipping freight, and this is 69% of revenue) and asset-light (31% of revenue). The asset heavy segment is a trucking freight company, with a specialty in less-than-truckload (LTL) shipping. LTL is exactly as it sounds: it’s for shipping freights that aren’t big enough to comprise a full truckload. The light asset division provides logistics services.

The LTL business usually picks up goods at an individual company that isn’t large enough to fill an entire truck. Small shipments are then consolidated at a service center. From the service center, they’re then delivered with smaller vehicles from the service center to the end customer. Pulling this off requires infrastructure and heavy staffing. This creates a low margin capital intensive business, but it also creates significant barriers to entry. ABF Freight, ArcBest’s asset-based carrier, operates 245 service centers throughout the United States. This is a large enterprise that is difficult to duplicate.

The asset-heavy line of the business is also labor intensive. Truckers are expensive, and there is currently a shortage of them. Labor costs represent 51.9% of revenues.

My Take

ArcBest operates in a tough business but maintains decent cash flow generation and a stable financial position, with a debt/equity ratio of 42%, compared to 99% for the industry.

The stock is down 47% over the last 52 weeks, and it is due to the usual suspects. The market is worried about a recession, and that would significantly reduce freight throughout the US. The trade war and tariff worries are also weighing the stock down.

LTL is a brutal business, but it is a growing one. I think it is likely to grow more as e-commerce and total freight expands throughout the United States. Customers are ordering large goods online. As people order things like couches online, the demand for LTL services will grow. Trucking is also something that grows organically with the economy, as you can see from the below truck tonnage data from FRED.

trucktonnage

Meanwhile, ArcBest’s asset-light businesses (Fleet Net, Panther Logistics, ABF Logistics) are good businesses and are growing significantly. In 2013, these divisions produced $571 million in revenue. This has grown to $971 million in 2018. These businesses use technological solutions to help their clients navigate complex supply chains.

ArcBest has a high degree of financial quality. The debt/equity ratio is only 42%. The Altman Z-Score is 3.34, implying a low probability of bankruptcy and a permanent loss of capital. The F-Score is a solid 6. ArcBest also maintains a large cash stockpile, currently at $9.60 share, representing 37% of the current market capitalization. I suspect ArcBest keeps such a significant cash position because they contribute to a multiemployer pension plan for current and former employees. This can result in payments outside of expectations, which is why ArcBest likely stays on the safe side and maintains a significant amount of cash.

The current P/E of 11 compares to an industry average of 16. On a price/sales basis, Arcbest currently trades at 22% of revenue, compared to an industry average of 99%. The stock currently trades at 4x cash flow. The EV/EBIT multiple is currently 5.23x, compared to a 5-year average of 14.57. As recently as 2018, the company traded at 10x EV/EBIT, which seems right for a company of this kind.

ArcBest certainly faces some uncertainty, but I think it is currently mispriced by the market and it is in a strong financial position which makes up for the tough business it is engaged in. They are also growing their asset-light division, which ought to improve returns on capital over the long run.

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.

Miller Industries (MLR)

tow

Key Statistics

Enterprise Value = $326.36 million

Operating Income = $47.34 million

EV/Operating Income = 6.89x

Price/Revenue = .42x

Earnings Yield = 11%

Debt/Equity = 14%

The Company

Miller Industries manufacturers towing and recovery equipment. They maintain multiple brands operating in three segments: (1) Wreckers – These are used to tow cars and trucks from car accidents. They make a variety of wreckers, including one-off tow trucks and more heavy-duty equipment. (2) Car carriers – These are flatbed vehicles with hydraulic tilts (an example is pictured in the stock photo). (3) Transport trailers – These are the vehicles you typically see on the highway stacked up with cars usually transporting new cars to an auto dealership.

Miller has a nice little niche with well-known brands in the industry, such as their Century line. The company as it exists today, is a result of a significant amount of consolidation over the years, as they’ve acquired multiple brands under the Miller umbrella.

Miller grows with the economy. As the economy improves, the miles which are driven in the US and internationally also grows. As driving mileage grows, so do car accidents. Miller’s success with wreckers, for instance, is tied to increasing numbers of car accidents that come naturally through more driving and more activity. In 2007, for example, there were 6,024,000 car accidents in the United States. This then declined with the recession to 5,338,000 in 2011. By 2016, the number of car accidents increased to 7,277,000.

miller

My Take

Obviously, this a cyclical industry. Miles driven is extremely cyclical. Miller also has international operations that can be affected by Trump’s trade wars. The stock is down significantly since Trump started escalating the trade war and is down 22% from its 52-week high, which was only reached back in May. This has been hammered by the usual subjects: trade war and recession jitters.

If we do have a recession, one advantage that Miller has is that most of its products are manufactured upon order. In other words, expenses can quickly be reduced if the economy dries up. This leads to the remarkable consistency in Miller’s margins. Their net margins, for instance, are typically around 4-6% regardless of the direction of revenue. In 2009, during the depths of the recession, Miller was still able to eke out a profit of $.51 per share, a year in which most firms produced losses. The stock price did collapse in the last recession, but it also traded at a much higher valuation at the peak of the last cycle. In 2007, it traded at 5x book value (it currently trades at 1.3x book).

While the market is speculating that a recession and trade war will adversely affect Miller, the company itself continues to execute. In the most recent quarter, for instance, income was up 29% over the same quarter a year ago.

Miller has a high degree of financial quality. Debt/equity is low, at 14%. The F-Score is 6, which is pretty solid. The Altman Z-Score of 4.16  implies a very low probability of bankruptcy and a permanent loss of capital.

If Miller simply continues to do what they’re doing and the market speculation about trade wars and recession subside, the multiple ought to increase significantly. Right now, from an EV/EBIT perspective, the company trades at 6.8x. The 5-year average is 8.6x, which would be a 26% increase from current levels. The P/E of 8.74 compares to an industry average of 20.94 and a 5-year average for Miller of 14.7. Miller currently trades at 42% of sales, which compares to an industry average of 129%. Quite recently, Miller traded at 55% of sales.

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.

Hurco Companies, Inc. (HURC)

laser

Key Statistics

Enterprise Value = $184.21 million

Operating Income = $34.87 million

EV/Operating Income = 5.28x

Price/Revenue = .83x

Earnings Yield = 10%

Debt/Equity = 0%

The Company

Hurco’s specialty is metal cutting technology used in the manufacturing industry. Their products are considered machine tool products. The primarily sell equipment and software used for the cutting of metal on an industrial scale. They have been in this business since 1968.

The sale of new machine tools represents 87% of Hurco’s revenue. 1% of their revenue is sourced from the software to run their machines, while an additional 12% originates from servicing machines that are already in use.

Hurco is a global company, and 71% of its sales occur outside the United States. Hurco has grown steadily with the economic expansion since the global financial crisis.

hurco

My Take

Hurco is currently 35% off its 52-week high. The stock has been under pressure for a few reasons.

  • This is a cyclical company. Hurco depends on the global economy and industrial production to continue growing. If we have a recession, Hurco will be adversely affected. Much of the pressure on the stock has been related to concerns about the global slowdown which started last year and the possibility of a recession.
  • Key commodity inputs have been increasing in price, notably steel. The strength in steel prices is a reason I own steel companies separately in the portfolio.
  • Hurco is a US company that derives 71% of its revenue from overseas. A trade war is bad news for Hurco.

All of these concerns are legitimate, but I think the market has overreacted to each of them. A surprise on any of these fronts will improve the stock price: the US economy doesn’t enter a recession, the trade war is resolved, commodity prices decline and improve margins. This is a bet that one of these current worries will go away.

In terms of the long-term competitive position of Hurco, I also think they are in a good place. A recession will only be a temporary problem for Hurco, mainly due to the strength of their balance sheet. Hurco carries no debt, and they currently have a massive cash stockpile. Management is clearly well aware of the cyclicality of their industry and is well prepared for it. The current price of the stock is $36.69. $10.25 of that price is cash. The financial strength is also reflected in a excellent F-score of 7. The financial quality of Hurco and cash position limits the downside.

From a valuation standpoint, Hurco is attractively valued compared to its history and its peers. The enterprise multiple of 5.28 compares to a 5-year average of 8.31. An increase to this level would represent a 57% increase from current levels. The P/E of 10 compares to an industry average of 20.81 and a 5-year average for Hurco of 16.21. On a price/sales basis, the current value of .83x compares to an industry average of 1.29x and a 5-year average for the company of .98x.

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.

Flanigan’s (BDL)

florida

Key Statistics

Enterprise Value = $51.94 million

Operating Income = $6.51 million

EV/Operating Income = 7.97x

Price/Revenue = .40x

Earnings Yield = 8.4%

Debt/Equity = 44%

The Company

Flanigan’s is a Florida-based business operating 26 liquor stores and restaurants. The company was founded in 1959 by Joseph “Big Daddy” Flanigan and the company’s namesake. The CEO and the largest stockholder is Joseph Flanigan’s son, James Flanigan. The company is operated and owned by the family. Insiders presently own 62% of the company’s stock. James Flanagan owns 374,320 shares of the 1.8 million shares outstanding.

Flanigan’s currently operates 26 liquor stores and restaurants. The restaurants are all based in South Florida with a relaxed, saltwater vibe to them. The liquor store chain is called “Big Daddy’s Liquor’s” and the restaurants are all referred to as “Flanigan’s”.  3 locations are liquor store/restaurant combinations, 6 locations are liquor stores only, and the remainder is restaurants.

The restaurants all have great reviews on Yelp, with the occasional bad review over some one-off poor service, something you’ll find for any restaurant. Most of the reviews are overwhelmingly positive. Check out these reviews for the Coconut Grove location.

The financials are excellent, growing, and healthy. Here are the earnings and growth trajectory for the last ten years:

salesgrowth

bdleps

Operating metrics are also respectable and consistent. Gross margins last year were 26.34%, and that is a standard arena for this company. They have some debt, but it is small and manageable. I am also encouraged by the fact that the company maintained positive earnings throughout the 2009-2012 period.

My Take

I found this stock while looking through companies at a sub-$50 million valuation with a high level of insider ownership. As I dug into the company, I was compelled by what I found. This was a well managed, growing, family-owned enterprise where insiders have strong incentives to keep the company moving in the right direction.

I don’t usually focus on book value, but the stock trades close to its book value, which is currently $18.93/share. On Friday, it closed at $24.34. Cash & equivalents represent 32% of the current market cap. By the traditional value metrics that I look at, the stock is compellingly cheap for such a well-managed, growing, enterprise. It trades at 40% of revenue, 5.5x cash flow,  with a 7.9x enterprise multiple, and trades at 11.9x earnings per share.

Institutional investors only own 16% of the stock. Because of the nano-cap valuation, this isn’t big enough to even be a part of the Russell 2000 index, and it is entirely overlooked by big investors. That’s why such a great company is selling for compelling multiples. Substantial insider ownership also reduces the float. Bottom line: this is an excellent company at a decent valuation that is overlooked by the market.

There is also a lot of room for this company to expand, even if they continue to maintain their Florida footprint. Florida is a big state with a growing population. It is currently the 4th fastest growing state in the country. If Flanigan’s maintained its current footprint of stores, they would continue to grow sales and earnings organically. However, I think there is a lot of room for growth. There are currently several franchise locations, and it looks like the company plans to continue to grow this footprint.  With such a small footprint, there is a tremendous runway for the company to expand.

As I’ve stated before, now that the yield curve is inverted and the Fed continues to quantitatively tighten the balance sheet even though they’re standing pat on rates, I think it’s probable that we’re going to have a recession soon. As with all things, I don’t know this for sure, but I think a recession is probable. This is why I currently have a large cash balance that is 30% of my portfolio and I’ve been more trigger-happy to sell if the stock hits a decent multiple or a 52-week high.

With that said, Flanigan’s will be harmed by a recession, but I think there is downside protection based on their cash position, liquid balance sheet, and the company’s performance during the last recession. I doubt that people will stop drinking alcohol and eating reasonably priced food at Flanigan’s locations during the next downturn. It’s also possible that people will spend more time at the liquor store when the inevitable recession hits!

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.

 

Hooker Furniture (HOFT)

couch

Key Statistics

Enterprise Value = $358.61 million

Operating Income = $49.48 million

EV/Operating Income = 7.24x

Price/Revenue = .53x

Earnings Yield = 10%

Debt/Equity = 15%

The Company

Hooker Furniture is a Virginia-based furniture company that has been in business since 1924. They own multiple brands. Their line of Hooker branded furniture includes items for home entertainment, home office, accent, dining, and bedroom. They also own an upholstery segment and acquired the Home Meridian brand in 2016.

Hooker primarilly sells their furniture to other retailers without the burden of a massive physical brick and mortar footprint. They sell their furniture primarily to independent furniture stores, department stores, warehouse clubs, and e-commerce retailers. Their furniture is featured prominently on Wayfair, for instance.

The stock has been punished since last fall due mainly due to macro moves in the broader market that aren’t showing up in the actual operating results of the company.

My Take

Hooker Furniture is a business with a bright long term future. I really like the fact that they don’t have a big physical brick and mortar footprint. This keeps them versatile as brick-and-mortar stores face pressure due to mounting threats from e-commerce. As furniture demand dries up in the stores, they should be able to quickly replace that demand with more sales to online businesses.

Hooker Furniture also has a solid long term track record. They never suffered a loss during the Great Recession, and have grown steadily through every year of the expansion. Their acquisition of Home Meridian is a smart move and was completed while maintaining a conservative balance sheet. The company earned $2.42/share last year, which compares to a $.80/share 5 years ago.

The risk is that this is a cyclical business. The yield curve just inverted and we are likely to have a recession in the next two years if past history is any guide. Despite this risk, when I saw this company show up in a few of my stock screens, I couldn’t resist it when I did more research. At current multiples, it’s too compelling of a bargain to pass up. It’s indeed an excellent company at a bargain price.

From a relative valuation standpoint, Hooker’s current P/E of 10.40 compares to a 5-year average of 17. The current P/E is also significantly below the P/E of competitors in the industry, such as Flexsteel, which trades at a P/E of 24. Another competitor would be Basset Furniture, which currently trades at a P/E of 19. An increase in P/E to the 5-year average would be a 63% increase from current levels. A P/E of 15 seems right for a steadily growing, well run, conservatively financed, and versatile company like Hooker furniture.  HOFT also trades at 53% of sales, which compares to an industry average of 72%. On an enterprise multiple basis, Hooker’s current 7.24x multiple compares to a 5-year average of 10.67. An increase to this level would be a 47% increase from current levels.

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.

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.