Well, we made it through the government shutdown and the debt-ceiling crisis, but I don’t think this is the end. This talk will come back again in the beginning of 2014. For now we can move on and look at company earnings as they are released and what is going on in the business world.
Before I get into my company of the week, I wanted to address something I saw in Barron’s about a week ago about those high-flying momentum stocks such as Facebook (Nasdaq: FB), Netflix (Nasdaq: NFLX) and Tesla (Nasdaq: TSLA).
I’m not saying these companies are bad; they are not, and they have great products. What I am saying is that there is no way the worth of the company can live up to the hype of the stock for any length of time.
Let me share with you a fact about automaker Tesla: The market value is nearly half that of General Motors (NYSE: GM), yet General Motors has revenue of $155 billion. Compare that with Tesla’s $2 billion in revenue. So doing some crazy math here, if Tesla could increase its revenue by 1,000 percent, that would still only be revenue of $20 billion — nowhere near the 50 percent mark of GM’s revenue of $155 billion or $77.5 billion.
So why does this stock trade at these levels? I don’t know, you tell me. Shareholders, beware.
I always like to find companies whose business is doing OK, yet they may stumble a little bit and the stock gets blown up. I saw that last week when bed-maker Select Comfort (Nasdaq: SCSS), after reporting a 7 percent increase in sales, saw its stock drop nearly 25 percent the next day as the company reduced its earnings guidance going forward. The reduction was only about 12 percent in full-year 2013 earnings, which is half the stock drop.
I also noticed a $17 million increase in sales and marketing expense over last year. Had the company not spent the additional $17 million in marketing, its earnings for the quarter would have been far higher than last year. Now we all know that marketing works, to what degree it is hard to measure, but I’m sure the longer-term returns of that additional $17 million expense will be well worth it.
Select Comfort has traded as high as $32.84 over the last 52 weeks, which is nearly 70 percent higher than current levels. Now with the pullback in the stock to about $19 and forward earnings of $1.69 for the year ending December 2014, the forward PE has become attractive at 11.2; compare that with the 19 times forward earnings when the stock was at $32 per share.
The company also has an attractive peg ratio of 1.26.
Select Comfort has a strong balance sheet with a current ratio of 1.61 and a quick ratio of 1.31, which means most of the company’s liquidity is in cash and short-term investments.
I also like that the company returned 37.6 percent on its equity over the last 12 months — nearly four times the industry average of 10.1. The net profit margin looks good checking in at 7.73 percent, when the industry average is only 4.13 percent.
The company gets high marks for efficiency: The receivable turnover is exceptionally high, turning over 73.8 times over the past 12 months, which is roughly 10 times the industry average of 7.8. It appears the company also does a great job of managing its inventory, which turned over 11 times over the last 12 months, compared with the industry turnover of 4.5 times.
One last point is that the capital expenditures for the first nine months increased to $57.8 million from $36.8 million in 2012. This money was used for investment in stores, new technology and product innovation — all good uses of money.
Also, the company has been buying back stock; during the quarter, the company spent $10 million to buy back 400,000 shares, and I’m hoping it will step in and buy more at these lower levels. Since last year, the diluted weighted average shares have declined by 1,238,000 shares. All this should help Select Comfort increase its worth going forward over the next 12 to 24 months.
Have a question or a company you'd like me to take a look at? Email me at email@example.com.
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.