Recent Buy - Williams-Sonoma Inc.
- I discuss my Recent Buy.
- Fundamentals and Risks.
- Valuation and Fair Price.
I recently submitted an article on three stocks that I consider to be undervalued here: 3 Stock Considerations
Before that article was posted, I made a buy of each of those company that can be seen at my website (which can be found on my profile page).
After that article was published one of the stock went down 3.5%. I saw this an opportunity to add more shares to that stock.
I added more shares to my portfolio with the purchase of Williams-Sonoma, Inc. (NYSE:WSM).
25 Shares @ $47.14 on 7/7/2017
My up to date portfolio can be found at my website as well.
Williams-Sonoma, Inc, is a specialty retailer for home goods. This company has retail locations in the USA, Canada, Puerto Rico, Australia and the United Kingdom. It operates through two segments: e-commerce and retail. WSM has numerous brand that it merchandises in. For example, Williams-Sonoma, Pottery Barn, Pottery Barn Kids, West Elm, and Rejuvenation.
WSM has had a revenue growth of $3.945 billion in 2008 to $5.084 billion Jan 2017. That is a CAGR of 2.86%. That is not really impressive but just wait.
As you see in this chart. From the total revenue of $5.1 billion, 52% came from e-commerce. I think this is great considering a lot of people now are buying their home goods online.
Source: 2017 Investor Presentation
This chart shows you how well WSM has been doing in the online space. They are ranked 21 in sales. I think that is pretty amazing considering all the online stores there are.
Source: 2017 Investor Presentation
Net Income grew from $196 million in 2008 to $305 million in Jan 2017. That is a CAGR of 5.04%. That's a little better.
Now let's talk about how Earning Per Share (EPS) grew in that same time frame. In 2008 EPS was $1.76 and in Jan 2017 it was $3.41. This gives us a CAGR of 7.63%. Now, that's a lot better. The share buybacks helped the EPS growth during that time frame especially last 3-4 years.
WSM sports a 3.41% dividend yield which I find to be great considering how hard it is to find a company with this high of a yield in this current market we are in. WSM 5 year dividend growth rate is at an excellent 17.2%. I do not see them increasing it at this rate in the near future but that's ok. There most recent increase, which happened in March, was 5.41%. I see WSM increasing their dividend in the mid to high single digit for the foreseeable future. Another thing to note is that WSM as been increasing their dividend for 12 years straight. That's something that a lot of companies can't say.
The current dividend payout ratio is 44%. This meets my criteria of less than 70% payout ratio. This gives WSM plenty room to grow its dividend.
With any investment, there is risk and uncertainty. Since WSM can describe the risks that the company has better than I can, the below statement was pulled out of WSM 2016 Annual report to shareholders.
Our financial performance is subject to declines in general economic conditions and the impact of such economic conditions on levels of consumer confidence and consumer spending. Consumer confidence and consumer spending may deteriorate significantly, and could remain depressed for an extended period of time. Consumer purchases of discretionary items, including our merchandise, generally decline during periods when disposable income is limited, unemployment rates increase or there is economic uncertainty. An uncertain economic environment could also cause our vendors to go out of business or our banks to discontinue lending to us or our vendors, or it could cause us to undergo restructurings, any of which would adversely impact our business and operating results.
Source: 2016 Annual Report page 6
This is all great and stuff, but what is WSM worth!?!?
The normal PE for 10 years sits at 17.3 as you see in the below picture from FastGraphs. WSM is now at 13.6 with a forward PE of 12.01. The 5-year PE average is 20.2. Theses metric is a great indicator that WSM is indeed undervalued.
This is a picture from fastgraphs.com Whenever the black line is under the orange/blue line, it is considered to be undervalued. Here we see that WSM is undervalued since it is under both the blue and orange line.
This chart is one of my favorite from FastGraphs because it shows the Normal PE where a company averages. As you see here, I like to pick a PE with the lowest multiple because it kinda gives me the worst case scenario. The normal PE here is at 14.7. WSM is currently at 13.6. Base on this, if WSM were to hit that normal PE of 14.7, we will get a total Rate of Return of 12.29%. That's pretty good.
Another great indicator to find is a company is undervalued is looking at the dividend yield history. The 5-year dividend yield average is 2.2%. WSM is currently at 3.41%.
As you this in this chart this is the highest it has been since almost 8 years ago.
Source: SIMPLY WALL ST
So how much should you pay for this stock?
S&P Capital Fair Price: $51.20
Yahoo Analyst Price Target: $53.00
Fair Value from SIMPLY WALL ST: $57.46
Source: SIMPLY WALL ST
My DDM Analysis: $56.47
This gives us a fair value average of $54.53. WSM is currently at $45.75. This means that WSM is 16.1% undervalued.
I currently have 50 shares of WSM and do not plan to add more unless it drops significantly. With the 50 shares and the company paying $0.39 a share in dividend, this will increase my annual dividend income by $78.
I think WSM will be a great addition to a dividend growth portfolio because of the dividend yield and divide growth rate.
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Analyst’s Disclosure: I am/we are long WSM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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