I am continuing my theme of profiling undervalued stocks this week with a company that has had a rough go of it lately, but might be trading at bargain basement levels now. The stock is down over 35% since the start of the year, but I think it represents terrific value at this price. The company is called HHGregg, Inc. (HGG).
HGG operates as a specialty retailer of consumer electronics, home appliances, and related services. The company offers video products, such as flat panel televisions, blu-rays, and DVD players; appliances, including washers and dryers, refrigerators, cooking ranges, dishwashers, freezers, and air conditioners; and digital camcorders.
Strong Earnings Beat
In late-May the company said that fiscal fourth-quarter earnings leapt 46%, which was helped by new store openings. Earnings per share came in at 39 cents, which beat the estimate by 10 cents or almost 35%. Revenues rose a strong 22% to $507 million. Gross margins increased and the company opened 42 new stores over the past year.
CEO Dennis May commented, “Despite industry headwinds and inclement weather around the Super Bowl selling period, we aggressively managed the business and delivered meaningful earnings growth in the fourth fiscal quarter. Strong inventory management and solid execution allowed us to increase gross margin by nearly 100 basis points while reducing per-store inventory levels by approximately 20% compared to the prior year.”
So Why Has The Stock Been A Dog?
Consumer electronics is a tough business do to well in, especially when you are going against the 800 pound gorilla in Best Buy (BBY). Add to that the fact that the economy has been soft and the consumer is strapped with debt. It’s not too hard to see why this fledgling company has been on the defensive.
That being said, I think the negatives are largely priced into the stock. It is currently trading at 10x current-year estimates of $1.30 per share, with an ultra-low price/sales ratio of 0.25x. Its balance sheet is clean with no debt and it sports a healthy ROE of almost 17%. It might take a while for investors to wade back into the stock, but at these levels, I think it would be a good long-term move to snap up some shares.
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