High-ish PE Ratio Scaring You Off? A Closer Look at Low/No Debt Retailers, Like Ann Taylor
When the University of Michigan and Thompson Reuters released their latest index of “consumer sentiment,” the index dropped to a level of 72.3, worse than the previous month, which had prompted headlines like, “Consumer Sentiment In U.S. Falls To Lowest Since December, ” and “Consumer spending, confidence fall to lowest levels of the year.”
Alarmists. The index still reads roughly in line or above most of the levels we’ve seen since early 2008. (You can see the press releases for yourself here. And you can compare it to the Conference Board’s Consumer Confidence Index here.
So it’s too soon to know what’s really happening with these confidence and sentiment indexes. For now, retail spending looks healthy.
Yet nervousness about consumers and their confidence has been a lodestone for retailing stocks. So even as the sales per share of, say, Wal-Mart Stores (WMT) has zoomed ahead, the stock’s PE ratio hasn’t recovered to its old highs.
I think the claims that the U.S. consumer is dead are so overblown. Economist Nouriel Roubini was claiming a few years ago that Americans would boost their savings rate as high as 10%. In fact, the U.S. Department of Commerce says the rate has slipped back a percentage point, to 4%, since early 2011.
Anyway, the good news is that if you’re hunting around for bargain-priced stocks that have been moving up lately, retailers fit both bills. One of the cheapest is that of Ann Taylor owner Ann Inc. (ANN). Its shares have been zooming ahead of the S&P 500 over the past couple of years.
Along the way, Ann’s PE ratio has tumbled, to around 15 times earnings.
Like a lot of retailers, of course, Ann had some heavy losses during the economic meltdown.
But the company is projected to earn slightly more than $2 a share this year and between $2.30 to $2.40 a share next year. That’s healthy growth.
Now, I know what you’re thinking. That trailing P/E ratio of 15 doesn’t seem very cheap compared to that of most blue-chip stocks. According to Barron’s the Dow Jones Industrials’ average ratio is 14.3 and that the S&P 500’s ratio is 16.4.
But see, Ann is a no-debt stock. Its $882 million in assets, which include $106 million in cash and equivalents, dwarf the company’s $511 million in liabilities, none of which are long-term debts.
You know, it’s pretty common for retailers to have no long-term debt. They’re wise to avoid having it, since they sign lots of long-term leases on their stores. (Those long-term leases are, essentially, off-balance sheet mortgages.) Normally, no-debt stocks trade at a much, much higher P/E ratio than debt-laden stocks. That’s why other debt-free retailers that resemble Ann, like Aeropostale (ARO), American Eagle Outfitters (AEO) and Abercrombie & Fitch (ANF), trade at P/E ratios that are way higher than is common for the S&P 500—and way higher than Ann’s.
I suspect that the gap between Ann’s P/E ratio and that of the other three helps explain why Ann’s shares have been performing well relative to them for the past two years.
Unless you’re really bearish on the economy or you believe the nonsense about the death of U.S. consumers, then Ann shares are worth a closer look.
Filed under: Investing Ideas