Sunday, October 18, 2009

BAGAKOAA October 18, 2009


October 18, 2009

Well it took about seven and half hours to sift through the list of retailers sent to my by my buddy Ben. The list was printed in US News World report. Here is the hit parade.

Aarons, Aeropostale, Amazon, Buckle, Dollar Tree, Gamestop, O’Reilly Automotive, Priceline and Staples.

I would not necessarily put Priceline or Amazon on the list as they are not like a traditional retailer, but I ran the numbers anyway.

Here is how they turned out.

Aaron’s Inc., AAN got a 76 points on my rating scale. They have a nice history of growth over the last 5 years. Net Income Before Taxes (NIBT) has averaged about 11% growth over the last 5 years. They have struggles with cash flow on and off. Their 6% Net Gross margin is better than industry and their 5 years history. The price to book is respectable at 1.78 and overall this is not an expensive stock at about a 15 multiple. Their return on equity is weak at 13.41. While the business model seems to support the poor but recovering economy, it does not excite me. They can pay off their long term debt in about eight months. 2010 earning estimates indicate this stock could be headed to 32 dollars a share from it current 27. They do throw a small dividend. Here’s the only reason why I would not invest at this time. The Chairman and Founder Mr. Loudermilk is also the Chairman of an Atlanta Bank that is very close to folding. While the two businesses have nothing to do with one another. It could be a distraction for him and could shake investor confidence, and as you will see there are better bargains on the list.

Aeropostale ARO is a great find. This 41 dollar stock has a great set of fundies. 5 years solid revenue growth, NIBT looks great for the last five year, only missed a perfect score or 100 by a tiny miss of positive cash growth in 2007 and a little weak ROE. IBD, Investors Business Daily gives it a 99. My rating is 85, one of the highest I have charted in a long time. So what do you do, do your homework. I went through six months of The NY Times articles (That is where they are headquartered), and I could find no skeletons in the closet. This seems to be a finely run company. I am in Monday am at 41.25. I will be looking for 49 by years end and 50-52 by Q1 2010.

Amazon, AMZN is one I looked at in May and gave it an 82. I ran all the numbers and visited the last 10Q on EDGAR. They report next week and it should be good news with the success of the KINDLE. Unfortunately if you have been watching the news the last few days, Walmart is taking Amazon on in the battle of the Titans. The stock is selling at a 62 multiple that should scare most people off. The fundies look good with the only chink in their armor being a weak margin, one year of not positive cash flow and a high price to book. In a nutshell I am not buying this stock, the same conclusion I came to in May. I’ll save you the trouble of looking it up, the stock sold for $82.65 the last time I did not buy it. I missed a 15% ride, as its at 95ish now, but I am not sorry.

Have you ever tasted a 1961 Chateau Haut Brion wine. Me neither. It is rated by most as a 100. You don’t find these 100 much. They only show themselves once in a blue moon. In the last two years, using my rating system, I have only unearthed two of them, SQM and this next retail beauty. Buckle BKE slammed it out of the park. They have the brands like Guess, Billabong, Lucky, Hurley to name a few. Really you need to go and look at the financials on this company. They got it all, growth, cash no debt, great ROE, and read management’s discussion from the last 10Q. They are overhauling their on line presence and building a 10 million dollar, 250,000 square foot distribution center there in Kearny Nebraska. This is a great story. I am in on Monday at 36 a share. I am looking for a double this time next year. Please confirm everything here. I spent about an hour and a half looking for a flaw on this stock and I can’t find it.

Dollar Tree, DLTR has a lot going for it. Fundamentals are solid and I gave it an 85 only missing a great score due to a missed year of growth for NIBT and cash flow. ROE was not above that 25 threshold as I like it. I could see this at 57-59 over the next 12 months. BUT, I think as the economy improves people will not be supporting Dollar Tree as much as they are now. I am not buying in.

GME Gamestop Inc. Love it own it. Just added to it a week or so ago and let you know in BAGAKOAA. Actually my son found this stock. This 27 dollar stock is headed towards 32. Assassins Creed and a few more major titles will kick this stock up. The Beatles Guitar Hero game was huge at GME. Last time I rated this I gave it an 85. Like any good wine this still has legs. There is some angst with this stock, estimates from analysts are all over the place making hard to look forward. Depending up which set of estimate you want to use, your could looking at a 20 dollar stock or 45 dollar stock. There is some relative strength issues that have analysts concerned. I don’t feel its critical as GME is in a unique sub sector. The rental end of the business which is showing strong growth in the weak economy takes this stock out of the normal retail category. Another issue bothering some analysts is the charting. There are some technical resistance above the 29 dollar range. You know how I feel about charting. Ned Davis research has an interesting chart showing GME in relation to 93 other retailers. They are pegged very strongly based upon fundamentals and very low based on technical analysis (Charting). Go with the fundies.

ORLY, O’Reilly Automotive. I have to be honest here. I started looking at it and I just don’t like cars or anything having to with cars. I am sure it is my own inadaquacies under the hood. I took a quick look at the fundamentals and yes there are nice looking. Decent PE, Book value is fair, revenue growth and profit growth is very strong, a little weak on the ROE, long term debt could be paid off in to years from current operating profits, and cash management look normal. Do you homework if you like this sector in retail as I just did a cursory review and did not rate. I am guessing it would come in in the high 70s or low 80s.

PCLN, Priceline. Come on they have William Shatner as their spokesman. Enough said, sell everything and buy Priceline. Well ok, let’s do a little homework. Revenue is great, profit is great, no debt, great ROE, cash flow has always been great. This is not a retail stock. It could be an internet stock like Ebay or Amazon, or it could be a travel stock. I don’t own it and at a PE of almost 65, I would not buy it now. Travel is one of the worst sectors, despite some promising reporting from the cruise lines, so I would not buy PCLN.

SPLS, Staples. When I first looked at this back in April, I was not impressed. By now I was hoping some of the recovery going on across the industrialized world might have made people go out and buy pencils and legal pads. Apparently not. Fundamentals are weak. ROE is weak and debt is large but manageable. With any luck at all this 23 dollar stock might be a 23 dollar stock by Q1 2010. When hiring comes back, not a drop in unemployment but an increase in employment, this will be a nice place to be. It will happen but it should take at least six months. Based upon 2010 earnings estimates and the current PE, you are looking at a 24 dollar stock. I’d keep this on a watch list and unless if 3Q surprises, look for a 18-19 dollar entry point.

Ulta Salon Cosmetics and Fragrance, ULTA. This 350ish retail boutique salon chain has impressed IBD who gives it a 96. I ran my numbers and came out with 75.6. Their margins are weak. ROE is not impressive. Their 5 year growth is diminishing. I just read an article in the WSJ about millions of people going back to cutting and styling hair at home to save money. Until we see a drop in personal savings from the current 7.2% to the levels of 2 percent in 2006, I don’t think I want to park money with ULTA.

So there you have it. In the course of doing this excersize I ran across a few other opportunities that might be interesting. I’ll save that for another iteration of BAGAKOAA.

Salve Lucrum


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