Does Warren Buffett's Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) know something we don't? In the case of Pier 1 (NYSE: PIR), Berkshire may be the contrarian indicator.
In the August issue of the Motley Fool Inside Value newsletter, Philip Durell took a look at the company's discount to its intrinsic value (a Buffett hot button) and concluded it belonged on his watch list. At the time, the stock was trading for $14.50 a share, and Berkshire had recently announced that it had purchased 8 million shares (9% of the company) for around $17.60 a share.
While hindsight is 20-20 -- and I'm not trying to criticize the excellent track records of Philip or Berkshire -- the results at Pier 1 have been downright dreadful. Same-store sales, the key metric for measuring a retail company's health, fell 12.4% in August. September and October chimed in with 10.6% and 10.4% declines, respectively. I was floored yesterday when the company announced that November's same-store sales increased 1.9%. My disbelief didn't stop there: The stock fell 7.7% on that news!
Estimated third-quarter results surely hurt the company's share price. The most recent quarter's sales came in slightly above analyst estimates. But instead of analysts' expected $0.05-per-share earnings, the company now predicts a loss between $0.08 and $0.10 per share.
The company expects positive same-store sales growth for December, albeit in the low single digits. That's believable, because most of the merchandise mix that scored positive results for November will still be there for Christmas.
Pier 1 sells for an inflated 32.7 times next year's projected earnings. That's high, but look at competitors Williams-Sonoma (NYSE: WSM) and Motley Fool Stock Advisor recommendation Bed Bath & Beyond (NYSE: BBBY). They've both found their niche and are producing consistently positive same-store sales, but they trade for 1.5 and 2.4 times sales. Pier 1 sells for 0.5 times sales, and as Philip might remind you, a P/S ratio below 1 is traditionally considered an indication of a value-priced security. If Pier 1 can hit its stride, there's plenty of room for margin improvement and stock price growth.
As for Berkshire, its holdings in Pier 1 have been cut by more than half, according to data from CapitalIQ. For the contrarians out there, here's a trade that goes against the Berkshire tide.
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