Please ensure Javascript is enabled for purposes of website accessibility

Is hhgregg's Stock Destined for Greatness?

By Alex Planes - Apr 8, 2013 at 8:24PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Let's see what the numbers say about hhgregg (HGG).

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does hhgregg (HGGGQ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell hhgregg's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at hhgregg's key statistics:

HGG Total Return Price Chart

Source: HGG Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

68.1%

Pass

Improving profit margin

(52.1%)

Fail

Free cash flow growth > Net income growth

5,190% vs. 60.6%

Pass

Improving EPS

60.3%

Pass

Stock growth (+ 15%) < EPS growth

(42.9%) vs. 60.3%

Pass

Source: YCharts. * Period begins at end of Q4 2009.

HGG Return on Equity Chart

Source: HGG Return on Equity data by YCharts.

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(23.4%)

Fail

Declining debt to equity

(100%)

Pass

Source: YCharts. * Period begins at end of Q4 2009.

How we got here and where we're going
With the exception of a weaker profit margin, hhgregg puts forth a surprisingly strong performance for such a hated stock. Five out of seven passing grades is nothing to sneeze at, but with a share price nearly cut in half over the last three years, we really should ask: Is the market wrong, or are these numbers completely meaningless for the future? Let's dig a little deeper to find out.

Although hhgregg's three-year performance has been decidedly underwhelming, it's joined fellow brick-and-mortar electronics retailers Best Buy (BBY -1.84%) and RadioShack (RSHCQ) in a bit of a 2013 rebound. None of these companies has actually shown progress -- in fact, all three suffered same-store sales declines, and hhgregg's took the worst fall, with its similar "comparable-store" metric down 8.3% for the holiday quarter. Since Best Buy's same-store results were essentially flat domestically, hhgregg investors ought to be seriously concerned about its long-term viability in a shrinking sector. Despite this threat, hhgregg's shares were already moving higher during the actual holiday season, particularly after a November earnings report sent shares spiking.

However, there's one obvious reason to appreciate hhgregg in spite of its flaws: It's still profitable. Recent earnings reports from Best Buy, RadioShack, and specialty retailer GameStop (GME -6.70%) all took floundering shares from value to value trap territory, and even prior to those reports, all posted higher valuations than hhgregg:

HGG PE Ratio TTM Chart

Source: HGG P/E Ratio TTM data by YCharts.

Conn's (CONN -3.56%) doesn't look good on this chart, so I left it out, but the gist is that it's been inconsistently profitable and is currently more than three times as highly valued as hhgregg, even though analysts project similar growth for both companies over the next five years. The only real advantage Conn's has is a better one-year forward growth rate, but even that only pulls its forward P/E roughly in line with hhgregg's 14 to 16.

The sad fact is that this entire sector of the economy may have little reason to exist as it's currently constituted. You can buy virtually anything found at Best Buy, RadioShack, GameStop, or Conn's online (whether on a certain Bezos-led e-retailer or not), and most of these retailers haven't shown that they can claim a niche valuable enough to justify investor optimism. Conn's has a bit more investor appeal in its big-ticket diversity, but there may be room in the market for the appliance-centric hhgregg -- if it can attract customers. Its latest earnings report shows that this remains an uphill battle.

Putting the pieces together
Today, hhgregg has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

hhgregg, Inc. Stock Quote
hhgregg, Inc.
HGGGQ
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$84.77 (-1.84%) $-1.59
RS Legacy Corporation Stock Quote
RS Legacy Corporation
RSHCQ
GameStop Corp. Stock Quote
GameStop Corp.
GME
$91.80 (-6.70%) $-6.59
Conn's, Inc. Stock Quote
Conn's, Inc.
CONN
$14.10 (-3.56%) $0.52

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
345%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.