Background- Aeropostale (ARO) has been hammered along with many other clothing companies such as American Eagle (NYSE:AEO) and Gap (NYSE:GPS) due to lower levels of consumer demand coupled with rising cotton prices. Cotton prices almost tripling year-over-year (y/y) along with industry-wide discounting to spur demand has caused ARO’s margins to be extremely crimped in the past two quarters. ARO has been extremely punished by the market and is currently down nearly 40% over the past 3 months.
Value/Upside- Aeropostale has a strong balance sheet and has not issued debt in the past 10 years. Currently (as of Q1-12) ARO has a net cash balance of $139.1M.
Aeropostale does not currently pay a dividend; however recent stock buyback programs have been very aggressive. Aeropostale began repurchasing shares in late 2004, and since 2005 has decreased share count by 35.2% (124.6M to 80.7M). This represents a 7% annualized reduction in outstanding shares. As of Q1-12, ARO had $145.2M remaining on buyback authorization (14.1% of issued shares based on current market prices).
Although ARO reported disappointing sales last week, the company has grown revenue at a 9-year annualized rate of 26.8% ($284M to $2.4B). In the same time span, ARO has grown EPS at an annualized rate of 30.3% ($0.23 to $2.49).
Best Buy (NYSE:BBY)
Background- Best Buy (BBY) has been shunned along with other retail companies such as Gamestop (NYSE:GME) and Walmart (NYSE:WMT) due to fears of a deteriorating market for B&M stores coupled with flat consumer demand.
Value/Upside- Best Buy currently pays a quarterly dividend of 16 cents (2.54% yield), with a 5-year annualized growth rate of 9.85%. Best Buy has repurchased 92.5M shares in the past 5 years (19% reduction), and recently announced a new $5M buyback plan. This new buyback plan represents 51% of outstanding shares at current market prices.
Best Buy has grown EPS at a 9-year annualized rate of 11.2%, backed up by annualized revenue gains of 12.3%. Operating cash flow for the most recent year was $1.2B, and BBY has net cash of $414M. BBY is being unfairly correlated with Blockbuster and Borders who had notorious amounts of outstanding debt which eventually forced them into bankruptcy.
Background- Although Intel (INTC) reported solid operating numbers in its previous report, it is also being punished alongside other big-tech names such as Microsoft (NASDAQ:MSFT) and Hewlett-Packard (NYSE:HPQ). Cloud-tech is the current market rage, and technology blue chips have been mostly cast aside.
Value/Upside- Intel currently pays a quarterly dividend of 21 cents (4.04% yield), with a 5-year annualized growth rate of 16%. Intel has repurchased close to 500M net shares in the past 5 years (8.6% reduction) and has authorization for another $8.2B in purchases (7.4% at current prices).
Intel has net cash of $5.65B and posted FY2010 operating cash flow of $16.7B. Intel has grown EPS at a 9-year annualized rate of 30% (5-year annualized at 18.5%) backed up by 9-year annualized revenue growth of 5.7% (5-year annualized at 4.3%). Intel has been able to boost EPS through focusing on margin strength while also buying back large quantities of shares (1.4B net in past 9 years).
Background- Microsoft (MSFT) also posted a strong quarter and FY11 results; however, market fears abound regarding the strength of Microsoft’s Office/Windows “moat.” Apple (NASDAQ:AAPL) has performed far better over the past 5 years and thus has much stronger investor sentiment.
Value/Upside- Microsoft currently pays a quarterly dividend of 16 cents (2.49% yield), with a 5-year annualized growth rate of 12.2% Microsoft has repurchased 1.7B net shares over the past 5 years (16.8% reduction).
Microsoft has net cash of $40.85B and posted FY2011 operating cash flow of $27B. Microsoft has grown EPS at a 9-year annualized rate of 21.1% (5-year annualized at 17.5%) backed up by annualized revenue growth of 10.5% (5-year annualized at 9.6%). Similar to Intel, Microsoft’s massive share repurchases and margin strength have enabled strong EPS growth. Microsoft’s cash pile leaves room for more repurchases (cash is 19% of MSFT’s market cap) and/or further dividend increases.
Background- Wal-Mart (WMT) has been cast aside by retail investors in the past few years who are more focused on Target’s (NYSE:TGT) growth story and who also focus on healthy alternatives such as Wholefoods (NASDAQ:WFM). Wal-Mart has also struggled alongside the broader market and is 13.7% below its 52-wk high. One sign of concern is WMT’s flat to small-decline in same-store sales; however, international growth has been mostly overlooked by investors.
Value/Upside- Wal-Mart currently pays a quarterly dividend of 37 cents (2.87% yield), with a 5-year annualized growth rate of 10.95%. Wal-Mart has repurchased 700M net shares in the past 5 years (16.7% reduction) and currently has authorization for an additional $15B (8.5% of cap at current market prices). Wal-Mart has grown EPS at a 9-year annualized rate of 12.6% (5-year annualized at 9%) backed up by revenue growth of 8.3% (5-year of 6.3%). Wal-Mart’s international growth should not be overlooked, and if Wal-Mart can turn its same-store sales positive for FY12, 15% EPS growth is not unreasonable.