Big Lots, Inc. (NYSE:BIG) stock faced a massive selloff following its earnings report. Though the company beat earnings estimates, revenues and Q1 guidance came in below estimates. However, the reduced Big Lots stock price has placed the valuation at a lowered level.
The modest multiple, along with increasing profits and dividends in a recession-proof business makes Big Lots stock a compelling prospect.
BIG Stock Fell Despite Beating Earnings
The discount retailer operates over 1,400 stores in 48 states. BIG sells a wide variety of goods such as groceries, household goods, furniture and small electronics.
Like with discount peers such as Dollar General Corp. (NYSE:DG), Dollar Tree, Inc. (NASDAQ:DLTR), and its subsidiary Family Dollar, a large portion of their offerings consist of overstocked or closed out merchandise.
This focus on overstocked products separates BIG from retailers such as Walmart Inc (NYSE:WMT) and Target Corporation (NYSE:TGT). However, should the economy tank, discounters such as BIG will likely benefit most with their ultra-low-cost products. Hence, Big Lots and its peers stand as the most recession-proof of the retailers.
In its latest earnings report released on March 9, Big Lots stock earned $2.57 per share, beating analyst estimates by 14 cents per share. Although the company beat earnings in every quarter of the 2017 fiscal year, they missed estimates on revenue.
Also, Big Lots issued flat to negative guidance to Q1. This sent BIG stock tumbling by over 13% after the earnings report. Fortunately, the company also issued positive guidance for all of fiscal 2018. Hence, the selloff appears overdone for several reasons.
BIG Stock Is the Company’s Latest Bargain
For one, the reduced stock price places the company at a low valuation, lower than any of its direct peers. The price-to-earnings (PE) ratio stands at 12 and falls below ten on a forward basis.
This compares well to such peers as Dollar General which carries a 20 multiple. Dollar Tree trades at 13 times earnings, and analysts expect profits to fall this year. The earnings of BIG stock are not falling. In fact, analysts expect BIG stock will see double-digit profit growth through at least fiscal 2020.
Also, investors enjoy a dividend that has never been cut. Since launching dividend payments in 2014, investors have enjoyed annual increases. Along with the earnings announcement, the company also told investors they would receive another quarterly dividend increase in 2018.
The Big Lots stock dividend increased to 30 cents per share, up from 25 cents per share in the previous quarter. The yield stands at around at about 2.15%. That remains lower than many retail peers. Still, the company can easily sustain the dividend as its Q4 earnings alone can easily cover $1.20 per share in annual dividends.
The only worrisome sign I see on the balance sheet relates to cash. BIG maintains only a minimum amount of cash on its balance sheet. The company consumes much of its cash reserves and issues debt to purchase more shares. However, debt levels appear manageable.
Moreover, the company can borrow further or suspend share buybacks if cash becomes an issue. While its low cash position appears concerning on the surface, the company can find workarounds.
The Bottom Line on Big Lots Stock
BIG stock offers investors the chance to buy into a recession-proof retailer at a low multiple and collect a dividend while they wait for growth. The recent selloff following its miss on revenue and negative Q1 guidance sent investors to the exits. However, this selloff placed Big Lots stock at a much lower valuation than its direct peers.
Moreover, analysts expect double-digit profit growth to continue for years to come. Best of all, the company is well-positioned to succeed in any economic climate. Given these conditions, Big Lots stock appears to be the company’s most compelling bargain item.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.