No. of Recommendations: 7
Seems like a long time ago that the stock was at $73 and we were hoping for some reversion of profit margins from 3.1% to at least 3.5%, over the next 5 years, and more optimistically to 4.5%, but no, it was just 3 short months ago, with the price at $73, that I said this:
In a nutshell, he [Bloomstran] recounts the history of the company and its missteps in the last 4-5 years. He thinks their net margins should be able to recover part way from today's 3.1% to the pandemic high of 6%. Not all the way, with higher labour costs and the shift to lower-margin consumbales, but he guesses the may be able to hit 4.5% once they clean up the mess from the bad decisions his successor made (debt from high priced repurchases, self-checkout, neglecting the stores, etc.) That would be enough to give the shares a 29% annual return over the next 5 years, starting at a $73 price, if his assumptions are correct, including a terminal multiple of 20. His bear case is for margins at only 3.5%, barely up from today, and a terminal multiple of 15, and that would still be enough for annual share appreciation of 16%.
I would say that today's results make these scenarios a lot more likely. Q1 2025 gave us a 3.76% net margin. It's only one quarter but if this holds up for the rest of the year, it would blow past the 3.5% hoped for in 2030 and would be well on the way to the more optimistic scenario of 4.5%, with modest gains in revenues as well. I guess they are not that optimistic, since even the high end of their full year EPS guidance of $5.10-5.80 target would only represent 3.1% margins, but this may be because they are investing a lot in fixing up the stores, so the longer-term target of 3.5% may still be quite attainable.
Bloomstran's bear case (with modest increases in revenues, some buybacks, 3.5% margins and a final P/E multiple of 15) gave a target share value of $137. The base case, with 4.5% margins and final multiple of 20, gave a price target of $235. The price is now $112, so while the turnaround looks more real, a lot of the hoped-for price appreciation has already been delivered. Just one quarter into this 20 quarter projection, we already have $39 ($112-$73) of the $64 gain hoped for under the bear case scenario, and $39 of the $162 hoped for under the base case scenario.
For the moment, I am keeping my 2% position, particularly since it seems like a natural hedge against overall market movements (it seems to often go in the opposite direction of the index.) But if the price did get up to close to the bear target of $135, without much further improvement, I'll be sorely tempted to sell at least half and take my winnings early in the game.
dtb
