Arden Group- Compelling valuations
Price: $ 89.20
Shares outstanding: 3.16 million
Market Cap: $ 282 million
Enterprise Value: $ 230 million
Debt: $ 1.2 million
LTM EPS: $ 6.6
LTM EBIDTA: $ 34.76 million
LTM FCF: $ 23.26
Return on equity: 31.1%
Return on assets: 18.8%
I. Arden has better operating margin, net margin than most competitors for the last 10 years. LTM operating margin & net margin are 8.1% & 4.1% resp.
II. Revenue is increasing steadily for last 10 years with only to decrease by 3% during the last year. It has weathered well to the economic downturn & limited its losses.
III. EPS has seen a consistence increase in last 10 years. In 2000, EPS was $ 3.45 & LTM EPS is $ 6.6 IV. COGS has remained steady V. Currently trading at 13.6 x EPS
2) Qualitative factors-
I. Large insider holding: CEO Bernard Briskin currently holds 57% of Class A shares. It makes his interests fall in line with the shareholders.
II. Share buy backs: Company has periodically bought back the shares & current number of shares outstanding is 3.16 million. Insider trading involved only buying in the last few years. It indicates that most believe in the potential of the company.
III. Niche market so unlikely to have competitors- It caters mostly to high end customers. Most of the competitors trying to cut prices, Arden emphasizes on giving the service better to those who value it. It is not in the market of low cost grocery. It has successfully maintained its income steady in spite of fierce competition & its limited resources. I doubt that it will be a takeover target for its competitors because Arden’s motto is different than most of its competitors making its mission out of line with others.
IV. Dividend payout- Company has paid out minuscule dividend of $ 1 every year with special dividends of $ 21 & $ 26 in 203 & 2008 respectively. It shows that management is interested in distributing the cash to the shareholders than expanding.
V. Need for financing- Company has very little debt implying its ability to sustain the business without any financing. The share buy back confirms this fact.
VI. Management seems to be convinced that the only way to growth is through cutting costs. It has not added a single store in the last decade. The fact that its cost of goods sold has remained steady despite the downturn.
VII. Goodwill- Company relies on loyal customer base than anything else. Employees are encouraged to recognize customers by their names. It values the service & the quality of the product. Company is able to increase the prices without losing customers because of their high income. This is one of the reasons behind company’s higher operating & net margin.
VIII. Costs in 2010- Company has got favorable rent terms. The rent expenses in the last 3 years were $ 10 million, $ 10.57 million & $ 10.6 million. In 2010 it is expected to be $ 10.3 million. Cost of sales (Warehouse, transportation, purchasing, advertising, occupancy) have actually been steady for the last 3 years at around $ 34 million. I believe the costs are going to be steady in 2010. With economic condition improving, company can perform better than 2009.
1. Limited expansion- Company has resisted the expansion for quite a lot of time now. This leaves company to grow only through expansion of current stores. The reason for this I cite is its affluent customer base. Company has to open stores in areas suitable to its mission.
2. Succession plan- CEO Bernard Briskin is 85 years old. He has been around for a while now. It will be a tough task to find a replacement for him. I guess Arden will be run by conservative management style until Briskin runs the office.
3. Low trading volume- Arden has very low trading volume. But I doubt it will be a problem for the stock to unleash its value. The stock has reached a 52- week high of 132. Before that it was trading in the 150s range. So the stock has performed well in the past. With conditions improving, I see no reason for the business & stock do well in next 2-3 years. I would recommend the stock to buy at this level & hold it at least for 2-3 years & a possible sell above $ 150.
Disclosure- I don't own the stock.