Value Stocks (Bed Bath and Beyond, Subaru and Express)
Barron’s round table last weekend highlighted a couple of interesting opportunities, namely Bed Bath and Beyond and Subaru.
After years of poor performance, that has seen the stock price fall by 80%, Bed Bath and Beyond ($BBBY) appointed a new CEO Mark Tritton in October last year. Mr Tritton has an outstanding track record, having previously helped turn around Target and Nordstrom. His speciality is improving merchandise and reducing the cost of private label.
That’s particularly relevant for Bed Bath who have seen their margins fall to just 3%. If Mr Tritton does what he’s demonstrably good at and implements better sourcing, cost-cutting, and sales growth — then margins could double, earnings should grow to about $4 to $5 a share and the stock could rise from $16.35 on Friday to $45 or higher.
That sounds very achievable on paper. However, what makes it more interesting is that Mr Tritton is backing himself with an equity heavy package. Instead of looking for cash he has taken $1 million – $2 million in cash with the remaining $8 million – $10 million in stock. That means his interests are aligned with stockholders and that he sees upside in owning shares.
Also highlighted by Barron’s was Subaru ($FUJHY). Subaru is one of the lowest-cost car producers and yet one of the most profitable, with 9% margins.
Its stock is very cheap (trading at nine times next year’s earnings, with a 5.4% dividend yield and 30% cash-to-market cap) because the market is concerned that volumes are about to peak. However the economics look good. Subaru’s cars are taking more market share (4% in the US) and consumers are shifting to sport utility vehicles which cost more.
Elsewhere, clothing retailer Express ($EXPR) shares jumped 20% on Wednesday following plans to shutter 100 stores by 2022. The move is expected to cut costs by $80 million and boost profits by $15 million annually. Additionally, over the same period, operating lease obligations are expected to drop by $85 million.
These are both significant amounts for Express and should provide a significant boost to its $80 million trailing EBITDA.
It’s no surprise then that the stock price rose 20%. However Express’ valuation still looks incredibly cheap — even after the increase. Its enterprise value is just $142 million with a market cap of $309 million, $167 million of cash and no debt the enterprise value.
Growth Stocks (Ollie’s Bargain Outlet and eHealth)
Ollie’s Bargain Outlet ($OLLI) shares hit a 52 week low on Tuesday before rebounding. However, as of Friday’s close, the stock was still down 40% from the all time highs set in May last year.
I am not surprised the stock is rebounding. The company had a bad start to the year in Q1 and Q2 as poorly-timed inventory decisions led to an excess of out of season goods and rapid expansion led to some cannibalization of sales. However Management’s assurances that set backs were temporary proved to be true as strong Q3 results in December beat expectations. Net sales increased 15.3%, operating income increased 22.0%, adjusted net income increased 28.3% and the company reaffirmed full year guidance.
Longer term, the potential for growth is very good. The company has 345 stores in 23 states and plans to increase its store count nationally to over 950.
The stock is currently trading on 26x trailing earnings. That looks cheap for a fast growing “off price” retailer with big plans that is (once more) executing well.
Shares of eHealth ($EHTH) jumped 27% on Friday after the online health exchange provider announced that preliminary Q4 revenue will be between $257.5 million and $259.5 million with earnings between $53 million and $55 million (c.$2.34 per share). Consensus estimates were for Q4 revenue of $194.9 million and EPS of $2.15.
Business is picking up for eHealth and the trend seems likely to continue. An ageing U.S. population, with the 65+ population expected to increase from 40 million in 2010 to 80 million in 2030, will mean more people buying private health insurance to enhance Medicare for decades to come. Additionally, its likely that those purchases will be made increasing online, where eHealth has established itself as a leader in a very fragmented market.
The stock is priced on 50x 2019 estimates but with 50% growth and a bright outlook the valuation looks very reasonable.
eHealth CEO Scott Flanders said, “We remain excited about the Medicare market opportunity and significant growth potential ahead of us and are looking forward to sharing our outlook for 2020 as part of our fourth-quarter earnings release next month.”
TherapeuticMD ($TXMD), a commercial-stage biopharma focused on women’s health, jumped over 20% on Tuesday after it was reported that JP Morgan had taken a 7% shareholding.
The company has three drugs on the market (Imvexxy, Bijuva and Annovera) with combined peak annual sales estimated at $1.85 billion. Be that as it may, TXMD is still in the early stages of building demand with trailing revenues of just $40 million.
The investment by JPM is important as the company burns through its $155 million of cash and investors look for signs that management is capable of delivering commercially. Reassuringly JPM’s move follows recent purchases in the past six months of $300,000 by the CEO and $400,000 by the company President.
Considerable risks remain with TherapeuticMD and its plans to develop commercial sales. However, I would say that with a market cap of $672 million compared to forecast peak sales of $1.85 billion, the rewards should significantly outweigh the risks.
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This is not a recommendation to buy or sell. Stocks are not suitable for everyone. Some of the stocks mentioned are risky small cap and/or highly speculative. Please do your own research.