Value Is Where You Find It
With the focus turning from growth to value we felt it time (once again) to highlight a couple of the undervalued gems that we favor. Because the consumer is also so much in focus, and because COVID-related trends are still very much in force, we thought we turn the spotlight on the consumer staples sector. But not on the typical undervalued consumer stocks like Kraft or Tyson, this time the focus on a pair of consumer staples retailers that are both growing in size as well as sales.
1. Village Super Markets Is Microcap Dividend Superstar
Village Super Market (NASDAQ:VLGEA) is a small, regional supermarket chain with several qualities going for it. The first is this company is growing on an organic basis and is not expected to slow down. Population growth within its region of operation is among the fastest in the nation and that is not counting the push to the suburbs or COVID-induced trends. The second is a semi-aggressive approach to acquisitions that has its YOY revenue growth in the double-digit range and accelerating into the second half of the fiscal year.
Village Super Markets had a very good fiscal Q1 with a topline growth of 19.5%. The acquisition of Fairways was a significant boost to the growth but, even so, organic growth topped 6.5%. Organic growth was driven by the combination of both ticket size and count which in turn contributed to an increase in margin. Net income increased 150% over the last year due to one-off factors in the prior year’s quarter. When adjusted for those events net income increased 28% to outpace net revenue growth by 850 basis points.
A third quality that Village Super Markets has going for it is the dividend. The company pays a healthy 4.20% yield that can be called steady if nothing else. The company hasn’t made a dividend increase in several years and there is no expectation it will. The company is only paying out about half of its earnings and has a strong balance sheet so there is also no expectation for a cut. What you can expect is for the company to continue paying the $0.25 quarterly distribution long-into the future.
2. BJs Wholesale Club Gains Market Share
BJs Wholesale Club Holdings Inc (NYSE:BJ) has been on our radar as an undervalued consumer staples retailer for some time. The company is a competitor with Walmart (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST) within its operating region and gaining market share against all three. The company’s $3.95 billion in quarterly revenue is not only up 13.8% from last year but driven by strong gains in membership fees. Membership fees, the best metric for counting consumer interest, is up 11% from last year and gaining momentum. On a comp-basis, ex-gasoline no-less, the company says sales are up 15.9%.
In terms of value, BJ’s is trading at a very low 12.73X this year’s earnings which is a deep discount relative to peers. The big boy in the group and only domestic pure-play on membership clubs is Costco and it’s trading at a whopping 32X its earnings. Costco is significantly larger than BJs and pays a dividend albeit a small one but that’s a big difference. Even Walmart and Target trade at more conservative valuations.
The technical outlook for BJs is a bit sour but there is a silver lining. Although price action has been and still is stuck in a trading range it is near the bottom of the range where we expect it to find support. Longer-term, this stock should move back up to the top of the range and set new all-time highs by the end of this year if not sooner.
