One of the fundamental elements of the Wall St. Cheat Sheet investing framework places the utmost importance on a company’s low debt position. In the case of J. Crew (JCG), the hip retailer paid down its remaining $49.2 million debt balance at the end of the third quarter. With a cleaner balance sheet, J. Crew became even more attractive to potential suitors. Earlier this week, J. Crew received a buyout offer from TPG Capital Group and Leonard Green & Partners LP for $43.50 per share in cash, or about $3 billion.
At a time when bears on Wall Street have been stuck in the mud since the crash of 2009, analysts put out a mixed reaction on the buyout. Considering J. Crew shares were once fetching more than $50 per share earlier this year, the private equity buyers smelled opportunity. If you look at the past four quarterly announcements for J. Crew, you will see the company surprised analyst expectations by an average of 13%-32%. On the heels of a strong year, a swift adaptation to seasonal retail trends and the fashionable support of America’s presidential family, the momentum allowed J. Crew to unlock value. With a fresh product pipeline and strong consumer demand, it does not shock me to see this week’s buyout offer.
On Nov. 5, we selected J. Crew Group as a WSCS Premium Watchlist Pick because our proprietary research provided a strong bull case for undervalued shares. On the date of our publication, shares were trading at $33.99 per share. Following this week’s announcement, the value opportunity of 28.5% was realized rather quickly.
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Disclosure: Wall St. Cheat Sheet Premium Watchlist Pick on Nov. 5, prior to buyout.