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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report.

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

©2020 InvestorPlace Media, LLC