I love companies with minimal debt burdens. In a context of low interest rates, they are rare finds as most companies rely on cheap debt to fuel their growth.
However, in these uncertain times, highly leveraged businesses are sweating over the prospects of diminishing cash flows and approaching debt payments. Coca-Cola just issued a $5 billion in debt offering to finance its operations and Disney is issuing a $6 billion debt offering for the same purposes.
Given the volatility of the markets and the total uncertainty over what lies ahead, it’s important for investors to focus on value stocks with solid balance sheets and good growth potential.
LULULEMON ATHLETICA INC
LULU is an athletic apparel retailer domiciled in Delaware and headquartered in Vancouver. Founded in 1998 as a retailer of yoga pants and other yoga wear, LULU has since expanded to sell its products internationally in 460 stores as well as online.
Here are the reasons why I believe LULU’s current dip may present an opportuity.
1 – STRONG REVENUE GROWTH
- 2019 Revenues are up 24% since 2018 and up 40% since 2017.
- EBITDA increased 37% in 2019.
2 – MARGINS & PROFITABILITY
- LULU’s 2019 Gross Margin is 55%. The gross margin was 52% in 2018 and 51% in 2017. These numbers are considered good for the apparels industry, where gross margins can hover anywhere between 40%-60%. Indeed, the competition in this industry is fierce and companies have a tendency of heavily discounting their products, which drives down prices and profitability. Thus, an average gross margin of >50% is good performance. Even better is the company’s ability to push margins higher every year.
- LULU’s 2019 Net Margin is 14.7%. The net margin was 9.7% in 2018 and 12.9% in 2017. LULU’s net margins range from average (9%-13%) to decent (14.7%). Although the company operates in a highly competitive sector, is should seek to maintain its net margins consistently above 10%.
3 – LOW DEBT & FREE CASH FLOW
What I like most about LULU are its amazing debt ratios:
- Current Ratio (CR) is 2.95, which is exceptional. Warren Buffet likes companies with a CR of 1.5 and above so to see a company with double that ratio is truly remarkable.
- Debt to Equity Ratio (D/E) is 0.28 which is exceptional. Buffet likes companies with a D/E of 0.5 or lower. Again, LULU goes well beyond that.
As a result of its ridiculously low debt, LULU is able to generate considerable cash flow. Indeed, it’s 2019 Free Cash Flow is an impressive 15% of revenues (516,972/3,288,319).
Granted, the coronavirus crisis is proving to be a major challenge for retailers across the world, but LULU’s extremely low debt and growing business mean it is favorably positioned to pursue its growth and increase profits once the global economy recovers.
GRMN is an American multinational technology company founded in 1989 which specializes in GPS technology for automotive, aviation, marine, outdoor, and sports activities. GRMN is also developing wearable technology that is competing with activity tracker and smartwatch consumer developers such as Fitbit and Apple.
With a yield of 3.70%, GRMN is a very popular stock among dividend investors.
Considering the stock is down 33% in the last month, should investors take advantage of this dip to dollar-cost average down?
Strong growth, low debt and sustained profitability suggest this stock may be well positioned to recover once the economic climate becomes favorable.
1 – STRONG GROWTH & PROFITABILITY
Since 2016, GRMN’s revenues, net income and EBITDA are increasing steadily.
- GRMN’s Revenues are increasing every year, with 2019 revenues up 12% from 2018 and 2018 revenues up 8.4% from the previous year.
- GRMN’s Net Income increased 37% in 2019. Although net income in 2018 was down 0.12% compared to 2017, this is may be an anomaly as 2017 net income was up 36% from 2016 and the company’s net income has been increasing since 2014.
- GRMN’s EBITDA is up 20% in 2019. 2018 net income was up 15.8% from 2017, which itself was up 6.3% from 2016. This is a very positive trend that suggests the company is controlling its costs.
2 – LOW DEBT
Like LULU, GRMN’s financial situation is very healthy:
- The Current Ratio is 2.95 which is exceptional.
- The Debt to Equity Ratio is 0.28 which is exceptional.
Low-debt companies are very hard to come by and GRMN’s Balance Sheet is exemplary.
3 – FREE CASH FLOW
GRMN’s 2019 Free Cash Flow is $578m, an impressive 15% of revenues.
4 – STRONG PROFITABILITY AND RETURN ON INVESTMENTS
GRMN is a profitable company whose management appears competent at using the company’s assets to generate returns.
- Gross margins are consistently above 55% since 2014,
- Net margins are superior to 22% since 2017 and are steadily increasing since 2014.
- Return on Equity of 23% is very good. ROE is superior to 10% since 2014 and on an upwards trajectory.
- Return on Assets of 15% is good. ROA hasn’t been less than 10% since 2014.
- Return on Investments of 19% is very good. Since 2014, ROI hasn’t been less than 17%.
5 – DIVIDEND
With an annual payout of $2.44/share, a 3.7% dividend yield is certainly attractive.
A 5-year growth rate of 3.46% is modest but the 52% payout ratio is perhaps high. Indeed, GRMN seeks to compete in the smart tech industry alongside Apple, which requires plethora R&D and marketing investments. Hopefully the company has well calculated the balance between generously rewarding its shareholders and allocating sufficient cash to investments.
The current yield of 3.70% is not at all close to the historic highs of 2011-2012 but is in line with the yield offered by most well established dividend stocks.
Lastly, GRMN’s dividend 10-year growth rate is an impressive 11.56%. However, as mentioned above, the 5-year rate is a much more modest 3.46% but the board is considering raising the dividend by 7% this year. Whether this will be done in the midst of the current crisis remains to be seen but GRMN’s desire to reward shareholders is unquestionable.
In sum, GRMN is a profitable, growing business with a very healthy balance sheet.
Further, the current market price gives the stock a P/E ratio of 13 which is low for a tech company.
Investors should look into this stock as the current price point may present a reasonable point of entry. However, as always, conducting further research is necessary before buying.
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Disclaimer: This is not financial advice. Do your own research before investing in any asset.