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Are these Companies going to Spook your Portfolio?

Tuesday, October 3rd, 2017

The Hershey Company (HSY): SELL With known brand names like Reese’s, Jolly Rancher, Kit Kat, and Twizzlers to name a few, there is no denying Hershey is a sweet company. The problem is the investment opportunity does not look as sweet as their candy. The valuation ratios look extremely expensive. The current P/E of 34.2 is above the industry average of 24.4; Price/Sales of 3.0 is higher than the industry average of 1.2; and Price/Cash Flow of 24.7 is also above the industry average of 14.0. The company does not have a material tangible book value as much of its equity is in intangible assets. Even when looking at the total equity, the numbers are not satisfying. The current Price/Book Value of 26.6 is more than I like to pay for the equity of a company. Investors do receive a decent dividend of 2.45%, but the company uses 76.5% of earnings to pay out that dividend. This does not leave much room for the company to invest in the business and expand its dividend. On a positive note, sales have grown by 2.5% over the last 12 months, which outpaces the industry average of 1.7%. Although sales have improved, EPS has fallen 8.3% over the last 12 months. The balance sheet also presents some major questions. While there is liquidity in the company, proven by a current ratio of 1.1; Debt/Equity of 347.5% is a huge concern. Looking out to December 2018 estimated GAAP EPS of $5.11 would give me a target sell price of $84.32.

Netflix Inc. (NFLX): SELL Netflix could be a great place to watch a scary movie this Halloween season, but the stock price spooks me as an investor. It has created a lot of excitement around subscriber growth which has sent the stock higher. Sales have also grown 33.6% over the last 12 months and EPS has risen 153.5% during the same time frame. While these growth numbers are strong, many investors were burned during the tech bust because they did not consider the value of the business they were buying. If I look at the valuation ratios, I see investors are overpaying for many aspects of the business. The current P/E of 219.75 is well above the industry average of 25.7 and Price/Sales of 7.6 is more than three times the industry average of 2.3. There is currently no Price/Tangible Book value, but even the Price/Book Value of 24.9 is extremely expensive. The balance sheet is beginning to look somewhat troublesome. The current ratio of 1.3 shows the company has liquidity, but the Debt/Equity of 155.4% has approached a higher level than I would like to see. Looking forward to December 2018, estimated GAAP EPS of $2.04 would give me a target sell price of $33.66. This shows investors are paying for a forward P/E of 87.9.

Dollar General. (DG): HOLD Although Dollar General provides low cost items, that has not stopped the company from growing. Over the last 12 months, sales have increased 8.4% and EPS has increased 3.6% during the same time frame. For the most part, the valuation ratios appear to be favorable. The current P/E of 17.9 is well below an industry average of 202.0; Price/Sales of 0.9 is half the industry average of 1.8; and Price/Cash Flow of 13.4 is favorable compared to the industry average of 22.1. The company has a nice balance sheet as the current ratio of 1.4 provides liquidity and total Debt/Equity is just 54%. Looking out to January 2019 estimated GAAP EPS of $5.02 would give me a target sell price of $82.83.

Dollar Tree (DLTR): SELL Although DLTR sells low cost items, it has been able to generate a strong profit margin of 4.4%. This has helped produce a nice ROE of 17.3. The company has also seen decent growth over the last 12 months as sales have increased by 4.0% and EPS has risen 29.9%. The valuation ratios also look favorable compared to the industry average. The current P/E of 21.7 is below the industry average of 202.0; Price/Sales of 0.9 is half the industry average of 1.8; and Price/Cash Flow of 13.0 is also below the industry average of 13.0. The company has nice liquidity as there is a current ratio of 1.83. I would like to see Debt/Equity a little lower, as it now stands at 100.2%. Looking to January 2019 estimated GAAP EPS of $5.10 would give me a target sell price of $84.15.

Big Lots, Inc. (BIG): BUY Big Lots provides consumers value products and investors strong valuation ratios. The current P/E of 13.3 is favorable compared to the industry average of 20.5. Price/Sales of 0.4 is below the industry average of 0.8. Price/Tangible Book Value of 3.7 looks appealing compared to an industry average of 9.9. Price/Cash Flow of 7.5 is also less expensive than the industry average of 10.1. The company pays a small dividend of 1.95%, but only uses 24.6% of earnings to pay out that dividend. This could provide the company with the flexibility to increase the dividend over the coming years. Sales have been relatively flat over the last 12 months, but EPS has risen 20.8%. Investors should understand how the company was able to grow its earnings without sales growth. The balance sheet also looks very strong as there is a current ratio of 1.6 and Debt/Equity is just 38.7%. Looking forward to January 2019, estimated GAAP EPS of $4.51 would give me a target sell price of $74.42.

Party City Corporation (PRTY): SELL Party City provides great Halloween costumes and positive valuation measures. The current P/E of 14.7 is lower than the industry average of 20.5; Price/Sales of 0.7 is below the industry average of 0.8; and Price/Cash Flow of 8.4 is also below the industry average of 10.1. December 2018 estimated GAAP EPS of $1.34 would generate a forward P/E multiple of 10.5. This is a good value for those future earnings, but there are some major questions with the balance sheet. There is currently no tangible book value and the company has a debt equity of 165.3%. These figures do not provide me comfort and lead to my sell rating on PRTY.

Mondelez International (MDLZ): Sell While the company has popular brand names such as Oreo, Chips Ahoy, Sour Patch Kids, Toblerone, and Cadbury; it appears investors are overpaying for those brands. The current P/E of 35.5 is well above the industry average of 24.4; Price/Sales of 2.4 is double the industry average of 1.2; and Price/Cash Flow of 26.2 is also well above the industry average of 14.0. The company has manageable Debt/Equity of 73.0%, but liquidity is a major concern as the current ratio is 0.53 and the quick ratio is just 0.35. There are also some questions surrounding the company’s growth as sales have declined 5.2% over the last 12 months and EPS has declined 75.4% during the same time frame. The company must have witnessed a major write off within the last 12 months, which would be an important factor for investors to understand. If I look out to December 2018, estimated GAAP EPS of $2.24 would give me a target sell price of $36.96.

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