In this article, I will run you through my comparable analysis for two stocks that have been depressed for a while and thus are significantly undervalued in my opinion. The following information serves as a helpful introduction, but for investors, further research is still warranted on their part.
Walgreen Company (WAG) shares have gradually declined 30.27% over the past 12 months, primarily driven by the sluggish growth expectations with revenues, EBITDA, and EPS forecasted to stay flat over the current and next fiscal years (see table below). At $29.09 per share, the stock is trading at 5.1x the NTM EBITDA and 10.2x the NTM EPS. Accounting for the growth potential, WAG trades at a PEG 0.9x.
Compared to its peer group (see table below), although Walgreen has the worst near-tem growth potential, it has an above-average performance in many of the profitability measures. The company is also able to generate fairly comparable free cash flows with less debt. The healthy interest coverage and current ratios suggest Walgreen has a solid capability to service the debt.
As such, it would make sense for Walgreen to trade at a very slight discount to its group average valuations. However, to justify the current market price of $29.09, the relative valuation model shown below actually requires a substantial discount of 27.5%, implying the market is likely over-discounting WAG's growth prospects.
In addition, after a year-long plunge, the dividend yield has risen to 3.8%. According to the charts shown below, Walgreen has been increasing the dividend per shares since Q1 1993, and it is very likely that the trend can be sustained, given the improvement of free cash flows in recent years.
Deckers Outdoor Corporation
Deckers Outdoor Corporation (DECK) stock has plunged 47.86% over the past 12 months, driven primarily by management's lower financial guidance, as revenue growth for some of its major brands is expected to experience softness in the near term. At a price of $44.20, Deckers trades at 5.0x the NTM EBITDA and 9.5x the NTM EPS. Analysts expect revenues, EBITDA, and EPS to experience a mediocre growth of 13.1%, 6.2%, and 4.0%, respectively, over the current and next fiscal years. Taking those into perspective, the stock is trading at a very low PEG of 0.5x, implying a large valuation discount to the growth prospects.
Based on the comparable analysis (see table below), which incorporates major US shoe manufacturers and retailers, Deckers underperforms its peers in some of the growth and free cash flow metrics. However, the company has superior the profitability measures. The healthy current and quick ratios should help the firm weather the near-term free cash flow downturn. Taking those into consideration, this company should be reasonably trading at a very slight discount to the peers. The relative valuation model suggests that an approximately 31.5% discount to both the group average P/E and EV/EBITDA multiples is require to produce the current market price of $44.20, indicating the market is over-discounting the negativity.
Bottom line, both stocks' valuation discounts indeed offer investors a solid margin of safety. A good strategy would be to sell out-of-money put options and collect the premiums upfront. If the prices end up staying above the strike price, the premiums are earned. In the case that the stocks dip further, investors can acquire them at more attractive valuations.
The comparable analysis tables are created by author, the dividend chart is sourced from CapitalIQ, and financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One, Bloomberg, CapitalIQ and Morningstar.