LAST week, the mostly cash retail chain published its results for the six months ended September 30 this year. In an extremely poor trading environment, the group’s total retail sales rose by 4,7% half- year on half-year and headline earnings per share increased by 15,1%. Delving into my archived files, I reread the two Forecast Factory columns in which I had discussed the company’s possible future share price trend, the first in November 2006 and the second in June 2007.
Forecasting in a bull market then was a doddle. In a bull market, unless a company was already wobbling, its share price was just about inevitable to rise. In November 2006, the share price was R24 and I reckoned it could reach R27 over a year. On May 23, driven by the bull market, the share peaked at over R33. In the June 2007 column, I noted that the share price had stalled at R31. Its investment fundamentals were strong, in particular, its management investment fundamental. I guesstimated that bottom-line diluted headline earnings per share would be about 220c for the financial year 2008.
If my guesstimate was right, the forward price-earnings ratio was 14,2, and the market seemed to expect higher than 20% bottom-line earnings growth this year. On this expectation, my forecast on the share price over a year was about R37 and this was confirmed by a technical up- count of R39.
Bottom-line diluted headline earnings per share in 2008 of 210,8c were a bit lower than I had expected. The market view on the figure for this year was over- optimistic — earnings improved by 16% to 244,6c. Even so, this was a good performance in a deteriorating trading environment.
By June last year the share was trading at about R15. Its forward ratings — based now on perfect hindsight — were a price:earnings ratio of 6,13, an earnings yield of 16,3% and a dividend yield of 8,9%. Yes, the bears were ravaging the market, but you didn’t need Warren Buffett’s acumen to spot that the share price was grossly undervalued. Retail sales were in the distress zone and, inevitably, Mr Price’s sales would be under pressure — that is, probably fall. However, its management fundamental wasn’t being factored into the share price.
Management was up to the task and focused on its objectives. As the directors noted in the interim report, during the half- year, “through the fashion value appeal of its merchandise, the group has continued to gain market share”. In this largest segment of its operations, the improvement was 9,2%.
For me, the core of its strong investment fundamental lies in the next sentence of the report: “These sales levels were achieved off an increase in gross inventories of only 2,2%.”
This is a striking example of success in managing assets astutely. The group bought products the market wanted at affordable prices and turned them over quickly enough to ensure the cash flow would be strongly positive.
It’s little wonder the share price is now trading a shade below R34, with an historic price:earnings ratio of 14,3, and earnings yield of 7% and a dividend yield of 3%.
Earnings growth for the company for next year could be pedestrian, but medium and long- term average annual compound growth should match its historic long-term growth of 23%.