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JoS. A. Bank (NASDAQ:JOSB) turned in solid results Thursday morning when they reported a 27% rise in quarterly net income for Q3. The stock was up over 10% intraday, but settled back to close up around 4% on the day. The stock fell hard during the conference call when management stated "while November was fairly good, December has been somewhat sluggish, however the biggest days are ahead of us so it is too soon for us to prognosticate on the results for December". I think two weeks worth of data can safely be ignored for the time being. I'll be sure to tune into Dec/Jan/Feb same store sales numbers for some insight on how the 4th quarter is shaping up before taking any action --- but my guess is the long-term story will still merit holding the stock.

I've liked the stock for some time, primarily for its valuation compared to its growth prospects. While I would agree with an underweight in the consumer discretionary sector as a whole, if you are looking for some exposure to a few retail stocks, this would be one to take a closer look at. The good thing is they offer a good product at some of the lowest prices around, so they may be able to gain market share as consumers shift towards more moderately priced goods.

I just read a great analyst report from Argus that is from last October (excerpt on Argus' valuation analysis copied below) that echoes the thoughts I've posted before. They have all the value characteristics you want compared to industry peers and the overall market, yet projected long term growth rates are well above peers and the market. It is a true small-cap GARP (growth at a reasonable price) holding and in my opinion, offers great risk/reward.

JOSB is trading at approximately 11.8-times our FY07 EPS estimate, compared to the peer average multiple of 16.6. In addition, the stock's PEG ratio of 0.56 is below the peer average of 0.9. The shares' EV/EBITDA ratio of 6.1 is well below what private equity firms have paid to acquire other specialty retailers. We thus believe that private equity investors could bid up the share price. Other metrics also indicate undervaluation. The stock's price/sales ratio is 0.9, compared to an industry average of 1.5, and its price/book ratio of 2.5 is also significantly below the peer average of 4.4.

Over the past five years, the shares have traded at P/E multiples between 8 and 24. In view of prospects for slightly less rapid earnings growth, we believe the shares warrant a multiple in the middle of this range. Our target price of $44 implies a potential 12-month gain of about 40% from current prices and a multiple of 16.5-times our FY07 estimate. We view this projected multiple as conservative given the company's record of delivering strong earnings in a challenging macro environment. On October 19, BUY-rated JOSB traded at $31.20, down $1.01.

Bear in mind, the stock price was down at $26.65 as of yesterday's close...this on a 4% up day.

The report also touches upon JOSB's strong financial strength, the likelihood of private equity being interested in a buyout, growing industry trends towards tailored clothing, and the expectation of a greater percentage of future revenues to come from catalog and internet sales which should improve margins. They sited the main risk (aside from the usual changing consumer tastes) is regarding their inventory management as they continue to add stores and in turn must maintain high levels of inventory --- something to watch for over the longer term.

Another item to note is that tonight on Fast Money, JOSB was featured on their Pops & Drops segment. Jeff Macke, the retail specialist, stated the company uses a random number generator to produce their quarterly EPS numbers and that there is no way to predict where they'll end up. While this may be true for their same-store sales numbers (as it is for almost all retailers), their EPS number has met or exceeded estimates for the past 6 quarters with 3 of the 6 quarters yielding positive surprises.

Looking ahead, the company is entering the best quarter seasonally for their business. Last year's 4th quarter results beat the analyst estimates by 9% ($1.36/sh vs $1.25/sh estimated), and this years estimates are only 4% above that number at $1.42/share. I will continue to hold and will only consider selling above $30. My valuation yields a price target closer to $36, but if it wants to go to $44 as Argus expects, that will be just fine with me.

Disclosure: Author is long JOSB

Source: JoS. A. Bank Turns in Another Solid Quarter

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