MIK: Buy Michaels’ Upside Potential

Michaels Companies Inc (MIK) delivered a solid “beat and raise” on Nov. 20. Sales and earnings-per-share both came in above consensus estimates, and management raised its full year guidance. This prompted analysts to raise their estimates for both 2014 and 2015, sending MIK stock to a Zacks Rank #1 (Strong Buy).

michaels-mik-stock-185Given its strong earnings momentum and shares trading around 14 times forward earnings, Michaels offers investors attractive upside potential.

Michaels is a specialty retailer focused on arts and crafts. MIK owns and operates 1,166 Michaels stores in 49 states and Canada and 121 Aaron Brothers stores. Michaels has a market cap of $4.7 billion.

Michaels Companies’ Third Quarter Results

Michaels delivered better-than-expected third-quarter results on Nov. 20. Earnings per share came in at 31 cents, beating the Zacks Consensus Estimate by 5 cents, which was a 19% increase year over year.

Net sales rose 1% to $1.13 billion, ahead of the consensus of $1.11 billion. Same-store sales slid 0.8% as Michaels lapped the hugely popular Rainbow Loom product in the same quarter last year. Michaels did much better than analysts were expecting.

Gross profit declined from 40.5% to 40% of net sales due to slightly lower product margins, higher occupancy costs and investments in e-commerce. However, selling, general and administrative expenses declined from 28.4% to 27.4% of net sales due to lower performance-based compensation and payroll taxes.

Overall, operating income rose 5% as the operating margin expanded 50 basis points to 12.6% of net sales. A major driver of earnings growth in the quarter was lower interest expenses due to a debt refinancing.

Michaels Companies’ Estimates Are Rising

Following strong Q3 results, Michaels management raised its guidance for the full year. Michaels now expects to earn between $1.42 – $1.44 per share, up from previous guidance of $1.38 – $1.42.

The improved guidance prompted analysts to revise their estimates higher for both 2014 and 2015, sending MIK stock to a Zacks Rank #1 (Strong Buy). The 2014 Zacks Consensus Estimate is now $1.48, up from $1.40 before the report. The 2015 consensus is now $1.72, up from $1.65 over the same period.

Michaels at a Reasonable Valuation

Michaels stumbled out of the gate following its initial public offering in June, but MIK shares have been on a tear since early November. However, the valuation picture looks very reasonable with MIK stock trading at 14 times 12-month forward earnings, which is a discount to the industry median of 18 times.

With strong earnings momentum and reasonable valuation, Michaels has plenty of upside potential.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/mik-buy-michaels-upside-potential/.

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