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In this article, I will run you through my quick analysis for two stocks with attractive valuations and solid financials to support continued upside momentum. This article serves as an introductory to potentially undervalued investment opportunities and your further research is still warranted.

GNC Holdings (NYSE:GNC)

GNC has recently touched its 52-week high of $41.95 and returned 105.91% over the past 12 months. At the current price of $38.09, the stock is trading at 18.2x the current fiscal year estimated EPS and 12.4x the LTM EBITDA. Even with the upward price momentum since its IPO in 2011, I believe the current valuation still provides solid upside potential for the following reasons:

  • GNC is able to hold up well amid the sell-off sentiment driven by European fiscal problems. The solid price is primarily owing to its zero exposure to Europe and the strong industry tailwinds (i.e. aging population and greater focus on health products).

  • Taking the growth prospects into consideration, GNC is trading at a 3-year expected PEG of 1.14x, which is a reasonable level given the firm's healthy financials and solid growth potential.

  • I have performed a comparable analysis for some major U.S.-listed health/wellness retailers (see below). GNC outperforms its industry peers in terms of various growth and margin metrics. Although GNC has significantly higher debt relative to the group average, its interest coverage is at a solid level of 7.4x. To justify the current market price of $38.09, a 37.5% discount needs to be applied to both the group average P/E and EV/EBITDA multiples. Given GNC's superior financial position, such deep discount appears overblown. Thus the current price level provides a solid margin of safety.

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According to below, the current and next fiscal year EPS estimates were revised upwards over the past 90 days.

(Click to enlarge)

  • Sell-side analysts are very bullish on the stock. Of the eight analyst ratings for the company, there are two strong buys, five buys, and one hold. The mean target price is $45.67, indicating a decent 20% upside potential.

  • GNC has consistently beaten both revenue and EPS estimates over the past four consecutive quarters.

  • The stock has a dividend yield of 1.15%.

Vera Bradley (NASDAQ:VRA)

VRA has recently dropped to its 52-week low of $18.19. At the current price of $22.81, the stock is trading at 13.46x the current fiscal year estimated EPS and 8.6x the LTM EBITDA. I believe the current valuation is really attractive based on the following reasons:

  • Both VRA's P/E and EV/EBITDA multiples are trading at a discount to its peers in the accessories and footwear category. The peer group's average earnings and EBITDA multiples are 16.3x and 9.9x, respectively. I believe the market has not given VRA enough credits to its above-group-average growth prospects, profitability, and liquidity position. Analysts expect revenue to grow at a 2-year CAGR of 15.5% over the current and next fiscal years, and EPS to grow at a 2-year CAGR of 18.3% over the same horizons. On the LTM basis, EBIT margin, net margin, ROE, and FCF margin are 20.5%, 12.5%, 55.8%, and 11.9%, respectively. Its debt to capitalization ratio is very low at 5.1%, and the net debt position is only $1.39M.

  • Taking the growth prospects into consideration, the stock is trading at a 3-year expected PEG of 0.60x, suggesting a significant discount to the future growth.

  • Sell-side analysts are very bullish on the stock. Of the 11 analyst ratings for the company, there are five strong buys, three buys, and three holds. The mean target price is $32.29, indicating a decent 42% upside potential. The stock has recently been upgraded to buy from hold by KeyBanc with a target price of $26. The research analyst cited the attractive valuation, a differentiated brand and offering, and solid square footage growth are the main thesis for the upgrade.

  • VRA has consistently beaten both revenue and EPS estimates over the past seven consecutive quarters.

  • The recent price drop is also partially attributable to short selling. Current short interests are 44.7% of the float and is in a decreasing trend. Short coverage down the road will likely give a support to the stock price.

Sources: Comparable Analysis table is created by author, EPS table is sourced from Yahoo Finance, and financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One, Bloomberg and Morningstar.

Source: 2 Retail Stocks With Attractive Valuations And Solid Financial Performance