Seeking Alpha
Long/short equity, value, research analyst, deep value
Profile| Send Message|
( followers)  

There is only one retail com­pany on January’s Most Attrac­tive Stocks list: Kirkland’s Inc. (NASDAQ:KIRK). KIRK is also one of the best per­form­ing stocks in the S&P 1500 since the Lehman bank­ruptcy. Given our value focus, it is rare that high-flying per­form­ers like KIRK make the Most Attrac­tive Stocks list.

KIRK is rare for other rea­sons, too. Com­pared to com­peti­tors like Bed Bath and Beyond (NASDAQ:BBBY), Target (NYSE:TGT), and Macy’s (NYSE:M), KIRK is much more prof­itable and is the only firm with a top-quintile return on invested cap­i­tal (ROIC) of 17.3%. Few retail­ers in the his­tory of our data­base have ever achieved such high returns on invested capital.

As most of our read­ers know, a high ROIC alone will not get a stock on our Most Attrac­tive Stocks list. The val­u­a­tion of the stock must be very cheap as well. And KIRK fits the bill nicely with a price-to-economic book value ratio of 0.5, which means the cur­rent stock price ($13.25) implies the company’s prof­its will per­manently decline by 50%. In other words, the val­u­a­tion not only implies no future growth, it implies a per­pet­ual 50% reduc­tion in prof­its. Mar­ket expec­ta­tions are set­ting the future-profit-growth bar quite low for this stock.

The company’s eco­nomic earn­ings are grow­ing at a faster rate (+1,538%) than reported account­ing earn­ings (+272%). Also, dur­ing the last fis­cal year, KIRK gen­er­ated $32.2mm in free cash flow, which rep­re­sents 12.4% of the company’s enter­prise value.

KIRK gets our “very attrac­tive” stock rat­ing because the busi­ness is throw­ing off a lot of cash, show­ing strong growth in prof­its while its val­u­a­tion implies prof­its will decline per­ma­nently by 50%.

KIRK fits the risk/reward pro­file of a great stock to buy. It increased net oper­at­ing profit after tax (NOPAT) on mea­ger rev­enue growth and increased its NOPAT mar­gin from 6.3% to 9.7%. KIRK’s ROIC rose from 9.9% to 17.3%. KIRK’s invested cap­i­tal grew more slowly than rev­enues, so invested cap­i­tal turns rose from 1.57x to 1.59x dur­ing the last fis­cal year.

Source: Kirkland's Quite a Bargain at $13.25