In this article, I will run you through some financial and valuation metrics for 3 small/mid-cap stocks that I believe are trading at excessively discounted prices but with robust profitability and very healthy liquidity positions. Although your further research is warranted, I believe this article will serve as a helpful introductory for identifying undervalued investment opportunities.
Guess Inc. (GES) - Market Cap of ~$2.4B and Dividend Yield of ~2.9%
Introduction - GES is one of the leading global brands engaging in designing, marketing, and distributing fashion apparel and accessories primarily in North America, Europe, and Asia. Its brand portfolio includes Guess?, Guess Jeans, G by Guess, and Guess by Marciano.
Valuation - GES stock is currently trading at ~$27, just above its 52-week low of ~$24. The shares declined ~11% YTD and ~41% from a year ago. The significant drop is primarily owing to its revenue exposure to European market, where it is being negatively impacted by austerity and economic uncertainty. At the current valuation level, GES is priced at 9.8x LTM EPS compared to the industry average of 20.0x and its 5-year average of 13.2x, indicating a substantial discount.
Growth - Revenue has experienced a 4-year historical CAGR of ~11.3%, and analysts expect slower growth of ~1.1% and ~7.6% in the current and next fiscal years, respectively. EPS has grown at a 4-year CAGR of ~9.5% and is estimated by analysts to decline at ~14.8% in current fiscal year and grow at ~14.2% in the next fiscal year.
Profitability - GES's LTM gross and operating margins are ~43.0% and ~14.5%, respectively, which outperform its industry averages of ~42.3% and ~6.5%. It also enjoys historically strong ROE trend, ranging from ~23.8% to ~28.4% over the past 5 fiscal years.
Liquidity Position - The firm has very minimal debt of ~$0.3M and is currently sitting on ~$490M cash, amounting to a net cash position of ~$489.7M, which is equivalent to ~$5.5 per share. Its current and quick ratios are 3.0x and 2.0x, respectively. The business is also able to generate solid free cash flow with an average FCF margin of ~8.4% in the past 5 fiscal years.
Potential Catalysts - The firm is currently under an expansion plan to grow stores in Asian and Southern European markets, where the economy is in much better shape. Signs of solid growth will likely boost the current stock valuation, as such growth will help mitigating the current revenue slowdown in Southern Europe. In addition, the firm's size, cheap valuation, global reach, reputable global brands, healthy balance sheet, and solid free cash flow margin make the firm a likely LBO target.
Risks - The stock could drop further if 1) its global expansion plan fails to meet expectations; 2) Southern European market slows down further; 3) commodity prices trend up - thus eroding margins; and 4) the company fails to stay in the forefront of the fashion trend.
DeVry Inc. (DV) - Market Cap of ~$1.8B and Dividend Yield of ~1.0%
Introduction - DV is a for-profit education company engaging in providing various degree programs in academic fields including business, technology, healthcare, and professional designations (i.e. CPA and CFA). It primarily focuses on the U.S. market.
Valuation - DV is currently trading at ~$27. It plummeted ~28% YTD and ~49% from a year ago, and is now just above its 52-week low of ~$26. The negative price action is attributable to for-profit education industry headwinds such as regulatory uncertainty, mounting student debt, and low graduate placement rate, resulting in massive downgrades of revenue growth expectations for a number of firms in the industry. At its current price, DV is trading at 9.0x LTM EPS compared to the industry average of 20.7x and its 5-year average of 21.5x, indicating a substantial discount.
Growth - Top line has experienced significantly historical growth at a 4-year CAGR of ~23.7%, however, analysts expect it to decline ~3.7% and ~3.3% in the current and next fiscal years due to industry-wide headwinds. EPS has grown at a 4-year CAGR of ~44.6%, but is expected to decline ~24.4% and ~13.6% in the current and next fiscal years.
Profitability - DV's LTM gross margin is ~55.0%, in line with the industry average of ~55.4%. Its LTM EBIT margin of ~17.5% significantly outperforms the industry average of ~1.8%. DV's 5-year historical average ROE is also at a favorable level of ~20.5%.
Liquidity Position - The firm has no debt and is currently sitting on ~$332M cash, amounting to ~$5.1 per share. Its current and quick ratios are in the safe zone at 1.2x and 1.1x, respectively. The firm is also a solid free cash flow generator, producing an average of ~12% FCF margin in the past 5 fiscal years.
Potential Catalysts - Differing from its industry peers, DV has solid revenue exposure (~28%) to healthcare education, which is less impacted by the existing industry headwinds and is enjoying tailwinds such as the trend of aging population and the growth of employments in the healthcare sector. DV is believed to be able to capitalize on these trends given its established position in the academic field and the ample financial flexibility.
Risks - Persistent industry headwinds may continue weighing on the firm's growth prospect, thus limit the stock's upside potential.
J2 Global Inc. (JCOM) - Market Cap of ~$1.1B and Dividend Yield of ~3.5%
Introduction - JCOM is an internet-based provider of messaging and communication services such as fax, voice-mail, and conference calling for corporate customers. It is an international player serving markets including the U.S., Canada, the UK, and other overseas territories.
Valuation - JCOM is trading at ~$24. The shares declined ~14% on both YTD and 1-year basis primarily due to its business exposure to European markets. At the current stock price, the stock is trading at ~10.2x LTM EPS compared to the industry average of ~14.7x and its 5-year average of ~13.9x, indicating a significant discount.
Growth - Top line has experienced decent growth at a 4-year CAGR of ~10.6%, however, analysts expect slower growth of ~3.9% and ~5.5% in the current and next fiscal years. EPS has grown at a 4-year CAGR of ~17.0%, but is expected to grow slowly at ~0.8% and ~4.3% in the current and next fiscal years.
Profitability - JCOM's LTM gross margin is ~82.3%, substantially outperforming the industry average of ~54.2%. Its LTM EBIT margin of ~43.8% is also significantly higher than the industry average of ~-9.4%. DV's 5-year historical average ROE is also at a favorable level of ~24.6%.
Liquidity Position - The firm has no debt and is currently sitting on ~$193M cash, amounting to ~$4.2 per share. Its current and quick ratios are very healthy at 3.3x and 3.1x, respectively. The firm is a robust free cash flow generator, producing an average of ~36.8% FCF margin in the past 5 fiscal years.
Potential Catalysts - The firm is currently expanding into the Japanese market, where internet-based fax and voice-mail penetration rate is much lower than the level in North America. This will likely help sustain revenue growth to some extent. The firm's size, attractive valuation, healthy balance sheet, and strong free cash flow generating ability will likely lure LBO from financial or strategic sponsors. In addition, short float is currently at ~38%, indicating potential short coverage down the road.
Risks - Continued slowdown in corporate IT spending, especially from European customers.
Financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One and Morningstar.