Kohl’s – Ready to Play Catch Up?

Note: I put this article up last night when the price of KSS at $51.15 (closing price), not realizing it would open substantially lower. KSS has traded today between $45.51 and $47.17. Paul noted that the stock was down today on negative same store sales from the Thanksgiving week. KSS’s on-lines sales were up. He said he was a big buyer today at an average price of $45.73. So, at this lower price, we are still adding KSS to the VIRTUAL Value Portfolio (below) at $46, and upping the number of shares to 65. In the future, rather than using last nights prices, I will wait till the next day to fill in a price. My apologies. ~ Ilene

Kohl’s – Ready to Play Catch Up?

By Dr. Paul Price 

A classic way to big profits is buying companies where the fundamentals kept improving while the shares stayed stagnant over relatively long periods. Wal-Mart (WMT) proved this theory is still valid earlier this year. Its stock went nowhere from August of 2008 through almost mid-year 2012 even as its EPS jumped from FY 2008’s $3.42 to an estimated $4.95 for the FY ending January 31, 2013.

 

 

WMT shares, at $70.80,  are now up about 24%  from this year’s low. WMT trades for a still moderate 14.3x current year estimate. In essence, WMT caught up with most of its past four years’ earnings growth of 44.7%, all in the last six months.

Discount retailer Kohl’s (KSS) now appears primed to do the same thing. The company has shown nothing but positive year-over-year comparisons over the past four years. Fiscal Q3 (ended October 31st) showed 13.7% growth at $0.91 this year versus $0.80 in 2011. Its shares have not yet reflected multiple and consecutive years of good news.

 

 

If Kohl’s hits its FY 2012 estimate, it will have grown EPS by more than 59% in four years. That’s a bigger jump in earnings than WMT posted over the same period.

At the November 28 quote of $50.85 KSS is offered at just below 11.1x this year’s projection. That’s a big discount to its 10-year median multiple of 18x.  Its average P/E from 2008 through 2011 was 13.9x even during poor economic times. Furthermore, its secure dividend provides a 2.52% current yield while we wait for the stock to catch up.

Kohl’s stock still looks undervalued and is long overdue for a move to at least $65 – $70 over the next 12 – 18 months. The mid-point of that range would be just about 13.3 times next year’s estimate of $5.07.

That’s quite achievable. KSS peaked at $75.50 during 2006 and hit $79.60 in 2007 on earnings that were well below today’s levels.

Value Line assigns Kohl’s an A+ for financial strength while noting its 90th percentile ranking for earnings predictability. (A 100th ranking is the best.)

Buyers now get the benefit of four years of growth without having to pay for it. My guess is that KSS stock will prove to be at least as good a bargain as its merchandise typically is.

My Trade for the Virtual Portfolio (screenshot below):  Buy 60 shares of KSS for $51.20 or better

Disclosure:  Long KSS shares

*****

Here is a screenshot of the most recent update of Paul’s Virtual Value Portfolio:

 

Notes:

Paul began this virtual portfolio on 10/28, buying approximately $3,000 of the stocks listed in column A. The prices in column H are the closing prices on 11/28/12.

Paul added to ESRX on 11/7, taking this position to 5%. Paul increased the allocation of CLMS to 5% on 11/26.

*Originally, Paul’s virtual portfolio position allocations were approximately 3%. We put 70% of our virtual cash into 23 stocks on 10/28, 3% each. Paul raised ESRX’s allocation to 5% on Nov. 7. He similarly raised CLMS’s allocation to 5% on 11/26. (Rule: positions should not exceed 5% of a portfolio.)

Virtual profits taken on the ANF position on 11/15 at $41.80.

TAP added on 11/19 at $40.15.

**NEW ACTIONS**

KSS added on 11/29 at $46.

ORCL added on 11/29 at $31.95.

 

Read the full newsletter: Market Shadows (11/25): From Fed, With Love. For the latest Market Shadows newsletter, click here. 

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