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Thoughts on Jos. A Bank Valuation

July 30, 2013 | About:

To begin with, here are some basic company highs and lows of Jos. A Bank (JOSB) to give you an overview to work with. Jotting down this information is like stretching and warming up before you begin an intense workout.

Highlights

  • FCF positive retailer since 2004.
  • Has increased shareholders equity every year for more than 10 years.
  • No debt.
  • No intangibles or goodwill on the balance sheet.
  • Cash-adjusted P/E is 10.
  • No financial risk.
  • TTM Piotroski score of 8.

Lowlights

  • Drop in ROE and CROIC from the highs of 20% in 2007 to 13% TTM.
  • Drop in ROE and CROIC resulting from margin decrease.
  • Cash conversion cycle of 260 days is more than twice the length of competitor Men’s Warehouse.
  • Recent inventory mix issues caused big miss in earnings.
  • Company is known for ridiculously big sales all the time.
These highlights and lowlights give you a good idea about the company. Nothing fancy, but it includes points from all three financial statements.

The Valuation Has Changed and Here’s Why

On June 21, the company released a press release that it is looking to acquire companies.

I interpret this as a company slowing down. Whatever the company has achieved until June 21, it’s not as important because this new piece of information changes the perspective of the valuation and investment.

Until 2013 results came in, you could expect Jos. A Bank to grow at 10% to 15%. And why not? It has a century of experience and decades of consistent and trustworthy performance. It’s an elite retailer.

However, there is a big difference between a retailer like Jos. A Bank acquiring companies and Google making acquisitions. Google acquires companies throughout the year, not for growth, but to acquire intellectual property and talent, eliminate potential competitors and improve inefficiencies. It doesn’t even matter if the business is different because Google can make it mingle or they cut it off.

I can’t say the same for Jos. A Bank.

They sell suits and men's attire and that’s all they have ever done. The management does not have experience with acquisitions and to bring in a whole new brand or retail strategy could do serious damage to the company.

The only benefit I can see is the quick, short-term fix in EPS that an acquisition could provide.

Jos. A Bank Valuation Ranges

If I assumed that Jos. A Bank would continue doing what it has always done, then I’m confident that the fair value is in the $40 to $45 range.

But things have turned in a different direction. More competition from other mid-tier stores like Macy’s and slowing sales for both retail stores and the Internet requires an adjustment to the expectations.

New stores will open, but with retail, new stores always have lower sales. As they mature, then sales increase.

While FCF is positive, it has fallen from the highs of $106 million in 2011 to $84.5 million in 2013. That’s a 20% drop.

What if FCF is zero going forward? How much will Jos. A Bank be worth?

  • DCF with 0% growth is $28
  • Tangible book value is $24
  • NCAV is $19
  • Current price is $41
That’s good downside protection on the stock and it provides a base value to work with.

Do I really think Jos. A Bank will continue with 0% FCF growth? No way.

It is also too high in quality to trade at NCAV or tangible book value.

So at this point, I know that the fair value must lie between $28 and $45.

Assuming that my slowing down prediction is correct, then my fair value estimate ranges between $35 to $40.

Right now, it’s trading just above my fair value range.

Jos. A Bank is actually a company that I’ve looked at since 2009. It was in the Best Small Companies list by Forbes and for some reason I ended up buying worse retail stocks. However, if Jos. A Bank decides to come back within my buy range, I am eager to snap up shares this time around.

Disclosure

No position

About the author:

Jae Jun
Founder of Old School Value (http://www.oldschoolvalue.com) dedicated to offering the most complete and detailed stock valuation and analysis spreadsheet. Investing made easy by importing 10 years of financials and 5 quarterly statements directly to excel for your analysis needs. Save time, make smarter decisions and make more money.

Visit Jae Jun's Website


Rating: 3.2/5 (6 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 8 months ago


A well thought out analysis.

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