With the current valuation of the U.S. stock market near the high end of its historical range, many analysts are expecting dismal returns for the asset class over the coming decade. But there are, of course, undervalued stocks in every market (recall that Wal-Mart and Wells Fargo both delivered positive returns in 2008).
Below are summaries of three stocks in the consumer discretionary sector that relatively low valuations.
Time Inc. (TIME)
Company Overview: Time is one of the largest publishers of magazines in the world; in addition to its namesake publication, it counts Sports Illustrated, People, and Southern Living among a lineup of more than 80 magazines. The company also operates the related web sites and hosts hundreds of live events each year.
Valuation and Dividend: Time is valued at approximately 9.7x trailing earnings. The company initiated a dividend in October 2014. The current yield and payout ratio are 4.1 percent and 24 percent, respectively.
Behind the Discount: Time’s industry presents a number of challenges. Magazine circulation and display advertising rates are dropping across the board, and Time’s top line has felt the impact. Advertising revenue has declined about 2 percent annually over the last five years, while circulation revenue has been shrinking by 4 percent annually.
In other words, the future isn’t promising. Though Time remains profitable, there is a very clear downward trend in both revenue and earnings.
TTM = Trailing 12 months as of June 30, 2015.
The challenging industry conditions make TIME a risky bet, and the presence of about $1.3 billion in debt on the balance sheet further increases the volatility.
Time did enjoy a very strong holiday season in 2014; net income for those three months was $145 million — or about 7 percent of the total market cap. Another strong holiday season in 2015 could give TIME a boost, but disappointing results could accelerate what seems to be an inevitable decline.
Gap (GPS)
Company Overview: Gap operates a number of retail clothing stores; in addition to its namesake brand, the company owns Banana Republic and Old Navy.
Valuation and Dividend: Gap is valued at about 10x earnings. The company has a dividend yield of about 3.5 percent and a payout ratio of about 31 percent.
Behind the Discount: Gap stock has been in freefall throughout 2015, as the company has repeatedly announced weak same store sales growth. Banana Republic sales have shrunk by about 10 percent compared to last year, though Old Navy has been one bright spot.
Similar to Time, Gap shares will likely be driven by holiday shopping trends in coming months.
While there are certainly some challenges, GPS seems to represent a better long-term opportunity. While Banana Republic is struggling, the meaningful growth figures from Old Navy certainly indicate a growth opportunity.
The company also remains solidly profitable; for the quarter ended July 2015, net income totaled $219 million. Based on that quarter, GPS trades at about 12.5x annualized earnings.
Pier 1 Imports (PIR)
Company Overview: Pier 1 Imports operates about 1,000 furniture and home decor stores in the U.S. and Canada.
Valuation and Dividend: Pier 1 trades at about 11x earnings. The company has a dividend yield of about 3.7 percent and a payout ratio of about 30 percent. Pier 1 also bought back about 10 percent of the outstanding shares in fiscal 2015.
Behind the Discount: Pier 1 has actually managed to generate modest revenue growth over the past few years, increasing the top line from $1.7 billion in fiscal 2013 (February year end) to nearly $1.9 billion in fiscal 2015. Additional administrative costs, however, have eaten into the bottom line; earnings fell by more than 40 percent over that stretch.
PIR is an interesting value stock; the company has focused on its e-commerce efforts in the last couple years, and now generates more than $200 million (about 11 percent of the total) now comes from online purchases.
Further, as mentioned above, revenue growth has been solid as the company has had a net reduction in the number of locations. Same store sales grew nearly 5 percent in fiscal 2015.
There is little room for error, however; PIR’s profit margin has declined to a slim 3.2 percent.
Have thoughts on any of these three stocks? Let us know in the comments below.
This article, 3 Dirt Cheap Discretionary Dividend Stocks, first appeared on Dividend Reference.