While fellow Fool Seth Jayson was looking for a bright side to the dim results from retailer Linens 'n Things
That rumor made the stock one of the NYSE's percentage-gain leaders yesterday morning. Is there room for more price gains?
In the second quarter, the company added 17 new locations, expanding to a total 516 stores. Sales for the quarter decreased 0.9%, and same-store sales fell 6.8%. The company lost $0.13 a share.
Same-store sales are expected to be negative in the third quarter before recovering for the critically important fourth quarter. Analysts expect the company to earn $1.14 this year, down from $1.39 last year. Heck, even when analysts look toward 2006, they only see earnings of $1.43.
Investors are still lured by the possibility that Linens 'n Things can juice its lowly 3.2% operating margins to more closely match Bed Bath & Beyond's
Though the company is debt-free, Linens 'n Things' $22.2 million in cash hardly qualifies as hoarding. In fact, it just about equals the company's negative $22.1 million in trailing annual free cash flow.
Competition comes from a wide spectrum of retailers, from discounters like Wal-Mart
Nonetheless, at current prices, the company currently sports a 6.7 ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to enterprise value (EV). That's far below the 12.3 commanded by premium performer Bed Bath & Beyond, and even below the 7.6 lowly Pier 1 fetches.
Clearly, a corporate buyer could find comparative value in this company; there's significant room for improvement and a pretty cheap valuation. That prospect may have sent the stock up to its new 52-week high on Wednesday. It peaked at 14.1% above Tuesday's close, although the stock settled back to a 9% gain.
Investors would be wise to consider that a buyout may not materialize, and higher gas prices may empty otherwise disposable income from consumers' pockets. That combination could rein in any near-term stock gains for this company. In light of that, I just don't think these linens qualify as investment material.