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Jonathan Poland
Jonathan Poland
Articles (505)  | Author's Website |

Party City Is a Massive Bargain

A boring moneymaker with a lot of potential for continued growth

October 10, 2018 | About:

Short Sellers have wrongly pushed Party City Holdco Inc.'s (NYSE:PRTY) stock down close to single digits. With Halloween three weeks away and almost 18% of the float sold short, it made sense to look at this business.

The company's gross margins (41%) are good for any retailer, much less one as unique as Party City. It generates over 21% returns on equity and is currently traded at just 6.4 times earnings, putting the price very close to its book value.

Party City spends around 40% of its net income on capital expenditures and is expected to earn north of $2 in 2018 and $2.17 in 2019. In other words, over the next two years, Party City is looking to book 33% of its current market value in after-tax earnings. This stock is traded more like a small business with tons of risk instead of one with a long standing dominant position in the market.

Party City may be a boring business, but its vertically integrated model has consistently produced bottom line growth in 19 of the past 21 years. Since going public in 2015, the company has continued its history of solid results, only now the income that was once kept private is being pushed down to the bottom.

Party City is a low-cost leader that generates 75% of its profit from designing, manufacturing and wholesaling party goods, leaving only 25% from the sale of third-party products, which makes it a lot less vulnerable to changes in customer spending. People also continue to spend money on all sorts of events, from birthdays and holidays to weddings and other special occasions, during good and bad times.

More importantly, in the next five years, it will be self-manufacturing over 50% of what gets sold in stores. Making goods in house costs less than sourcing them from third-party vendors, which will mean higher margins and further growth in profits.

Short sellers have pushed the stock down over 28% since the July high on fears that tariffs on imported Chinese goods will pressure bottom-line margins. Those margins, by the way, are hovering around double digits. Additionally, tariffs will not stop Americans from spending money.

The party supplies retailer has posted earnings beats during the first three quarters of the year, and should continue to grow on the top and bottom line. It's also trying out new ideas, such as an Amazon.com (NASDAQ:AMZN) storefront for this Halloween season and more than 50 pop-up toy stores for Christmas. It continues to acquire franchise locations as well as several additional vertical businesses that bring capabilities it doesn't already have.

If the company continues this trend, it could increase the top and bottom lines an average of 4% and 7% for the next five years. That would put the earnings number north of $3 per share. Even in the most risk-adverse market, a 10 times price-earnings multiple would put the stock at $30.

This one is a no-brainer. Ron Baron (Trades, Portfolio) and Julian Robertson (Trades, Portfolio) have significant positions in the stock along with smaller holdings from Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). All of these guys are down but not out in this bargain stock.

Disclosure: I am long PRTY calls.

About the author:

Jonathan Poland
I spent more than 15 years helping DIY investors earn over 30% a year. Today, I help business leaders take those insights and build better assets. I rarely write about stocks that I own. Thanks for reading. Do your own analysis before investing.

Visit Jonathan Poland's Website

Rating: 4.0/5 (2 votes)



Salleeaz - 1 year ago    Report SPAM

Does the amount of long term debt bother you?

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