It's good to find largely unknown companies with clean balance sheets, good dividend payouts, strong returns on capital, and a focused market niche. Perhaps, then, Cato
For the fourth quarter, Cato reported that total sales rose about 6% as same-store sales grew about 2%. Margins improved significantly at both the gross and operating lines, and operating income jumped 41%. It's regrettable that the company did not provide a cash flow statement with its earnings release, but I would still be comfortable estimating that Cato grew structural free cash flow by at least a strong high-teens percentage.
In some respects, Cato is a sleepy retailer. It typically builds stores in strip malls that are anchored by large discounters like Wal-Mart
Sleepy though it may be, this company generates very strong returns on invested capital and has done so for a while. That has also translated into good cash flow. The company is debt-free, pays a nice dividend, and is self-funding its store expansion plans.
The biggest fly in the ointment here for me is that the company has a dual share structure that gives Class B owners disproportionately better voting rights. Management does not seem to be abusing this power -- salaries and options awards seem quite reasonable, and the company returns capital to shareholders -- but it's still something that we at the Fool don't generally like to see.
While this stock has had a good overall run since 1997, it has stalled a bit recently. A discounted cash flow valuation analysis doesn't suggest huge potential undervaluation here, but it's tough not to be a little interested in an operator with superior returns on capital and a disciplined management approach.
For more Foolish thoughts on retailing:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
