Each week, it takes me longer and longer to find companies to invest in that are priced at a good value.
A little over a week ago, I was on CNN to do a segment because the market had hit new highs. I’ve been saying right along that as the market goes up, it appears to be fairly valued, and finding companies to buy is no easy task.
I was happy the next morning to hear Warren Buffet on CNBC say basically the same thing about the market appearing to be fully valued. I’m also hearing that many people, not just investors, are jumping in to buy companies such as Facebook (Nasdaq: FB) and Tesla Motors (Nasdaq: TSLA), which are trading at valuations that can give one a nosebleed.
Could these and other companies continue to go higher? Of course. But investors should not throw caution to the wind. Instead, remain calm and patient, and wait for better values.
One company I finally found that has some potential is fashion retailer Chico FAS Inc. (NYSE: CHS). The company operates 1,357 stores in 48 states. With more than 6,600 employees, the company targets women ages 40 and older with private-branded clothing and accessories. Market cap of the company stands about $2.6 billion, and the stock has a 52-week high-low of $19.95/15.27.
When I first looked at Chico’s, I was happy to see a current PE of 16.5, below the industry average of 19.4. Price to sales also favored the company at 1.04, compared with the industry at 1.28. Price to tangible book value, which is what I also look at when looking at book value, is only 3.7 for Chico’s -- compared with 5.5 for the industry average.
I also will point out one problem I’m having in finding good value on companies: Finding those that have a reasonable tangible book value. And in some companies, if one takes out all the intangible assets, there is no equity value left. Not a comforting feeling for me, nor should it be for any true investor.
Price to sales followed suit and favored the company at 9.8 versus the industry at 12.2.
Year over year, sales for Chico’s were up 8.7 percent, more than double the industry average of 3.6 percent for the same period. The sales are growing at about 8.3 percent year over year, also beating the industry average of 7.6 percent growth. With the nice sales and earnings growth, the company does manage to pay a dividend of 1.3 percent, using only 16 percent of its earnings to pay it.
Chico’s should look at increasing that dividend at least to a 25 percent payout ratio.
Investors won’t find a much stronger balance sheet than Chico’s. The company has a current ratio of 2.0, which is just below the industry average of 2.3. However, the company has no debt on its balance sheet and $300 million in cash and short-term investments. Add to that cash flow of $143 million, I wonder why this company is not paying a higher dividend and not buying back more stock. It did, over the past year, have a net buyback of about 7 million shares, but I think the company could step it up a little more on both the buybacks and the dividend.
Return on equity is decent at 15.1 percent, which is the first negative I have seen for this company when comparing to the industry average at 24.6 percent. The net profit margin checks in at 6.4, just below the industry average of 6.6. Inventory turnover looks very good for the company at 5.7 for the last 12 months, beating the industry average of 3.4 for the same period.
Looking at earnings estimates going forward, the company is expected to earn $1.06/share for the year ending January 2014, and then is expected to increase those EPS by 18 percent to $1.25 come January 2015, which is based on the mean estimate of 19 analysts. I should also point out that the $1.25 is down from $1.35 three months ago. There are two ways of using the forward earnings-per-share estimate of $1.25: One is that the forward PE is reasonable at 13.3 and second that the target sell price based on my conservative multiple of 16.5 would equal $20.63. Using the $20.63, the target sell price would be only a 24 percent gain, so I would have to recommend waiting until the stock drops a little or that the target price were to increase before buying this company.
Have a question or a company you'd like me to take a look at? Email me at firstname.lastname@example.org.
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.