It seems that just about every large brick-and-mortar business is being sold off these days. While the fear may be warranted for some retailers -- after all, store closures are expected to exceed 2009 levels this year -- there will still be those that survive. Here are a few possible names to scoop up from the bargain bin.
Pandora A/S (NASDAQOTH:PANDY) -- the jewelry brand, not the music-streaming service -- has been sold off mightily this year, falling 24% year to date. That may seem as if the business is going the way of commoditized apparel retailers, but Pandora's metrics don't match up to the pessimism.
Last quarter, revenue increased by 11.5% year over year -- not exactly a declining business. While there was some margin compression, that's because the company is investing in a new ERP (enterprise resource planning) system, and spacing its marketing spend more evenly throughout the year (as opposed to concentrating in the high-revenue fourth quarter).
More importantly, the company grew 91% in China. Growth has been so robust in the Middle Kingdom that the company recently increased its projected openings there this year. China only contributes 8% of company revenues but is the largest jewelry market in the world, which means there's a long runway for growth even if the U.S. (which provides 26% of revenue) is somewhat challenged.
Pandora currently trades at just 12 times trailing earnings and pays a 5.8% dividend, and management is buying back stock. Assuming the company's sales don't fall off a cliff, that's a clear bargain.
A weak second-quarter box office, the rise of streaming, and talk of premium video-on-demand (PVOD) have sparked huge sell-offs in movie-theater stocks this year. Large amounts of debt and locations at supposedly 'dying' mall have resulted in a 60% sell-off of AMC Entertainment Holdings (NYSE:AMC), the largest U.S. theater chain.
But has the hate gone too far? The dismal second-quarter box office actually followed a record-high first quarter. I think there's a good chance that it's simply a question of sub par movies released this spring. This winter will bring Star Wars: The Last Jedi, Thor: Ragnarok, and Oscar contenders that should all lure theatergoers back out.
Moreover, PVOD is estimated to cost $30 to $50 per viewing, which is comparable to the cost of a theater trip for a couple. With movie theaters upping their game in terms of amenities, it is unclear what kind of impact this would have on theater traffic if it's even implemented.
AMC recently gave full-year guidance of $860 million to $900 million in EBITDA, down from previous expectations, but also revealed that maintenance capital expenditures are only $160 million. That means AMC could make at least $600 million in operating income if it stopped its growth investment in recliner seating. That would easily cover annual interest payments of roughly $260 million, and since the company doesn't pay taxes due to historical net operating losses, that means AMC only trades at about five times "true" earnings.
CBL & Associates
If malls are dying, what could be worse than a mall-based REIT? Investors have been running from CBL & Associates Properties (NYSE:CBL), which operates malls, shopping centers, community centers, and office properties in the Southeast and Midwest, with the vast majority being mall properties.
The company now trades at just 11 times earnings. However, as with many real estate companies, a more accurate measure of cash flow is funds from operations. This is a much better figure; even in this bad year, CBL projects FFO of $2.18 to $2.24 per share in 2017. That covers the hefty $1.06 dividend by over 100%, which means things would have to rapidly deteriorate for that payout to be cut.
Moreover, the company is repositioning its portfolio. In the past quarter, the company sold off two Tier 2/3 malls while replacing tenants at rents that were 8.1% higher than the vacating tenants paid. This is because the company is shifting away from challenged apparel retailers toward dining, fitness, and even hotel and office space. Only 30% of new leases went to apparel retailers.
Of course, not all is well. Overall occupancy declined from 92.6% to 91.6% last quarter, with same-center mall revenue declining 2.4%. Still, that's hardly catastrophic, and the company also projects occupancy in stabilized malls to rise to between 93% and 93.5% by the end of the year. Meanwhile, as the company adjusts to the times, investors are paid a whopping 13.2% dividend.
Billy Duberstein owns shares of AMC Entertainment Holdings, and of CBL and Associates Properties. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.