Trading On margin

There is still great value in the jackpots for dividend investors

We’ll say it right away, Big Lots (NYSE: BIG) is such a deep stock that we’re shocked it’s still trading at just 11x its profits.

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May 29, 2021

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This story originally appeared on MarketBeat

Jackpots are insanely good value for income investors

We’re gonna get out right now and say it, Big Lots (NYSE: BIG) is such a deep stock that we’re shocked that it’s still trading at just 11 times its profits. Big Lots is not Costco and shouldn’t trade at 38 times earnings, but it’s worth at least the 17 times the earnings and 18 times the earnings paid for shares in BJ’s Wholesale and Target. Big Lots, like BJ’s, Target, Walmart, and Costco, is a high-quality retailer backed by stay-at-home trends, home improvement trends, and the company’s multi-year turnaround plan. Started about a year before the onset of the pandemic, Operation Northstar is a driver of the success of the business we see deliver value for investors long in the future.

Big Lots follows Operation Northstar with great success

Operation Northstar is a national rationalization The business that includes reformatting store layouts, refocusing on merchandise, improving the customer experience and developing e-commerce, all helped position the company perfectly for the pandemic. Today, more than a year after the start of the pandemic, the company is still growing and on track to maintain growth over the next few years.

The $ 1.63 billion declared net income is up 13.2% from last year. And that comes on top of last year’s 11% year-on-year gain and beat the consensus by 580 basis points. Revenue strength was driven by an 11.3% increase in model store sales which more than doubled the consensus estimate and were supported by e-commerce. E-commerce, the mainstay of the Northstar operation, has seen its activity grow by 30%. Executives report that there has been double-digit growth in all non-food and consumables verticals, which is not surprising. The fiscal first quarter saw the heaviest pantry load ever during the pandemic. Notable segments include seasonal items and the Broyhill line which was added last year. The Broyhill line grossed $ 225 million this quarter and is expected to account for over $ 1 billion in annual sales very soon.

Going down to the profit part of the report, gross margins and operating margin have widened over the past year. The gross margin rate improved by 50 basis points to 40.2% while the operating margin rate improved by 230 basis points to 7.2%. And operating margin and gross margin exceeded consensus, also resulting in a substantial improvement in bottom lines. In the end, GAAP EPS of $ 2.62 beat consensus by nearly a dollar and is up more than 100% from last year.

Jackpots give weak indications

Big Lots shares fell more than 5% after the first quarter report and could go down further. The move was driven more by indications than anything else, but we believe the market was wrong. the company declined to provide a full-year outlook, but said it expects second-quarter PEs in the $ 1 to $ 1.15 range, which is higher than the consensus estimate. The forecast assumes a small double-digit drop in comparable sales due to the very difficult comparison last year which we believe scared the market. The second quarter period of last year saw revenues increase 30% year over year to set a business record that was broken. A 10% drop in revenue in the second quarter would bring net revenue to $ 1.48 billion, which remains a historically high amount for the company. Better yet, in the two-year comparison, a 10% year-over-year decline in second-quarter revenue is still worth a 25% increase over the two-year period.

The technical outlook: Jackpots retract to another buying opportunity

Big Lots shares fell more than 5% after the first quarter earnings report was released and we view this as a buying opportunity. Not only does the company’s turnover increase, but its profitability improves and its dividend becomes more secure than ever. At current prices, the stock pays around 1.85%, has a payout rate of less than 20% and a fortress balance sheet. There is nothing not to like about this stock. As for stock prices, we expect support to form a nice base in the $ 61.50 region before regrouping to rise again. And one more thing, the company just approved a $ 500 share buyback program that will definitely help keep the price action on the rise over the next few quarters.

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