I track approximately 200 dividend-bearing stocks, and once a month, I reevaluate each company using a rating system I devised. I then compare my ratings with those of the analysts covering each individual company. During January’s rerating cycle, I was struck by the gap between Foot Locker’s current share price and the average twelve-month target price of analysts. Analysts see a 33% upside for the retailer in the coming year. Expedia’s shares are nearly as undervalued.
My personal investments outperform the market when my rating system and analysts agree a company is significantly undervalued. It is my perspective that both companies are mispriced by the market, have safe dividends, and are likely to outperform the broader indexes in the coming year.
To Understand Foot Locker, You Must First Know Nike
According to Jeffries’ analysts, 70% of Foot Locker’s (NYSE:FL) products are Nike’s brand. Furthermore, Foot Locker’s quarterly sales have a 79% correlation with Nike’s (NKE) North American sales. Foot Locker goes where Nike leads.
Nike’s sales have grown by an average of 5% annually for the last three years. During Nike’s second quarter, sales jumped 35% YoY. Most importantly, for Foot Locker, the North American market grew 10%.
Foot Locker’s Metrics Point To A Strong Retailer
Of course, a substantial portion of Nike’s growth stems from e-commerce, but Foot Locker is credited with reaching cash-paying customers: Roughly 30% of purchases in Foot Locker are made with cash, and Jeffries’ analysts claim that customer profile doesn’t buy online.
Additionally, Nike ended the company’s partnership with Amazon (AMZN), and that is likely to provide at least a marginal boost in Footlocker’s sales of Nike products, both online and in store.
Footlocker has strong same-store sales which were up 5.7% last quarter. If you ignore currency fluctuations, sales increased 5.1%, and gross margins and operating margins showed improvement. The company also can boast of a robust share buyback program: In the first three quarters, the firm repurchased roughly 7% of the stock. All in all, not bad, yet the shares are down roughly 17% since November and $25 dollars off the 52-week high.
Admittedly, this is a mixed picture for Foot Locker, but if analysts are anywhere near the ballpark for Footlocker’s price target, then the shares are in the bargain bin.
Headwinds
A consumer preference survey conducted by BrandShop reports that 88% of shoppers prefer a brand’s e-commerce site to purchasing with a third-party retailer.
Foot Locker has plans to boost e-commerce revenue. However, the increased capex needed could weigh on margins and earnings.
Valuation And Dividend Metrics
As I type these words, Foot Locker trades for roughly $39 per share. The average twelve-month price target of the 21 analysts covering FL is $52.42.
FL has a (TTM) payout ratio of roughly 32% and a dividend coverage ratio of nearly 315%. With a yield of nearly 3.9%, the dividend is safe. The five-year dividend growth rate stands at 11.5%.
Expedia Was Hammered By Google
Expedia (EXPE) investors watched as the shares experienced a 27% loss following the company’s latest earnings report. The company missed on revenues and EPS, but arguably the true cause of the stock’s decline was the move by Google (GOOG) to give its own vacation rental and apartments business preference in Google search.
Management stated, “weakness in SEO volumes and a related shift to high-cost marketing channels.” SEO is shorthand for Search Engine Optimization. By prioritizing their own offerings, Google takes business away from Expedia. Consequently, Expedia must spend more on marketing to make up for the lost clicks. Morningstar analyst Dan Wasiolek estimates Expedia will have to raise the marketing budget by a sum equal to 2% of sales to combat the SEO loses. Bad news, indeed, but let’s take a moment to consider the positives.
The Market Is Ignoring Robust Growth
Expedia grew EPS by 16% last year, and the company forecasts an EBITDA increase of 5% to 8% for 2019. Even in a down quarter, Vrbo, the firm’s online vacation rental portal, experienced revenue growth of 14%.
Morningstar forecast Expedia’s share of the global travel booking market will climb from a 5.9% share today to 6.8% in 2023. Furthermore, Expedia reported solid 9% third-quarter bookings growth in the face of a travel industry demand slowdown, and the company is gaining market share in the US, with 60% of bookings, a two-year increase of 23%.
Skift predicts growth in International travel of half a billion million trips in the next decade. The International Air Travelers Association forecasts an annual passenger growth rate of 3.5%. This translates into a doubling in passenger numbers by 2037.
Skift also broke the news that Google will no longer charge airlines for referrals from its Flights search engine. Consequently, consumers searching Google for flights may view link from an airline or travel agency. Currently, Google’s search results would appear before all others.
There are those associated with these industries that believe this may spell a reprieve for Expedia and other travel-related sites, as there may be pressure from the Federal Trade Commission for this change. If so, this would relieve the current concerns regarding how Google’s change in search results present headwinds for Expedia and others.
Headwinds
The coronavirus is weighing on everything related to travel.
Expedia will have greater expenses related to marketing.
Valuation And Dividend Metrics
As I type these words, Expedia trades for roughly $108 per share. The average twelve-month price target of the 27 analysts covering EXPE is $138.48
EXPE has a (TTM) payout ratio of roughly 38% and a dividend coverage ratio of nearly 262%. With a yield of approximately 1.25%, the dividend is safe. The five-year dividend growth rate stands at 17.2%.
My Perspective
To a great extent, an investor’s take on Foot Locker depends on one’s perspective of brick and mortar retail in general. I, for one, see the “retail apocalypse” narrative as overblown. Yes, I agree that e-commerce presents a stiff headwind, yet at the same time, I can’t see retailers going the way of the Dodo.
Consider this report from IHL Group. For every retailer closing stores in 2019, five are opening new stores, and for every chain store closing, there is an average across retail segments of 5.2 chain store openings.
In 2018, chain store closures peaked, and in 2019, 64% of retailers increased their store count.
I have no position in Foot Locker, but I do own puts with a strike price of $37.50 which expires on 02/28/2020. If the contract is exercised, I will be happy to add the company to my portfolio.
I, currently, hold EXPE shares which I purchased shortly after the last quarterly report. I will not prognosticate on the effect the coronavirus will have on the shares other than to opine that any related loss in the stock will likely be relatively short term. I view the shares as undervalued and rate the EXPE as a BUY.
One Last Word
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Additional disclosure: I have no formal training in investing. All articles are my personal perspective on a given prospective investment and should not be considered as investment advice. Due diligence should be exercised, and readers should engage in additional research and analysis before making their own investment decisions. All relevant risks are not covered in this article. Readers should consider their own unique investment profile and contemplate seeking advice from an investment professional before making an investment decision.
Disclosure: I am/we are long EXPE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.