There is still great value in jackpots for dividend investors

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Right now we’ll say it and say it, Big Lots (NYSE: BIG) is such a deep stock that we’re shocked that it’s still trading at just 11x its profits.

May 29, 2021

4 min read

This story originally appeared on MarketBeat

Big Lots is a shocking value for income investors

We’re gonna get out right now and say it, Big Lots (NYSE: BIG) is such a deep stock that we’re shocked that it’s still trading at just 11 times its profits. Big Lots is not Costco and shouldn’t trade at 38 times earnings, but it’s worth at least 17 times earnings and 18 times paid earnings for shares in BJ’s Wholesale and Target. Big Lots, like BJ’s, Target, Walmart, and Costco, is a high-quality retailer backed by stay-at-home trends, home improvement trends, and the company’s multi-year turnaround plan. Begun about a year before the start of the pandemic, Operation Northstar is a driver of the success of the company we see deliver value for investors long in the future.

Big Lots follows Operation Northstar with great success

Operation Northstar is a national rationalization From the activity that includes reformatting store layouts, refocusing on merchandise, improving customer experience and building e-commerce, all of these have helped position the company perfectly for the pandemic. Today, more than a year after the start of the pandemic, the company continues to grow and is on track to support its growth over the next few years.

The $ 1.63 billion declared net income is up 13.2% from last year. And that comes on top of last year’s 11% year-on-year gain and beat the consensus by 580 basis points. Revenue strength was driven by an 11.3% increase in comp-store sales which more than doubled the consensus estimate and was supported by e-commerce. E-commerce, the mainstay of the Northstar operation, has seen its activity grow by 30%. Executives report that there has been double-digit growth in all merchandise verticals other than food and consumables, which is not surprising. The first quarter of the fiscal year saw the heaviest pantry load ever during the pandemic. Notable segments include seasonal items and the Broyhill line which was added last year. The Broyhill line grossed $ 225 million this quarter and is expected to have annual revenue of over $ 1 billion very soon.

Moving on to the profit part of the report, gross margins and operating margin have widened over the past year. The gross margin rate improved by 50 basis points to 40.2% while the operating margin rate improved by 230 basis points to 7.2%. And the operating margin and gross margin exceeded consensus, which also led to a substantial improvement in financial results. In the end, GAAP EPS of $ 2.62 broke consensus by nearly a dollar and is up more than 100% from last year.

Big Lots gives low focus

Big Lots shares fell more than 5% following the first quarter report and could fall further. This decision was driven more by forecasts than anything else, but we believe the market was wrong. the company declined to provide a full-year outlook, but says it expects second-quarter PEs in the $ 1 to $ 1.15 range, which is higher than estimate consensus. The forecast assumes a small double-digit drop in comparable sales due to the very difficult comparison last year which we believe scared the market. The second quarter period of last year saw revenues increase 30% year over year to set a business record that was broken. A 10% drop in revenue in the second quarter would put net revenue in the order of $ 1.48 billion, which is still a historically significant amount for this company. Better yet, in the two-year comparison, a 10% year-over-year decline in second-quarter revenue is still worth a 25% increase over the two-year period.

The technical outlook: big lots fall back on another buying opportunity

Big Lots shares fell more than 5% after the first quarter earnings report was released and we view this as a buying opportunity. Not only does the company’s turnover increase, but its profitability improves and its dividend becomes more secure than ever. At current prices, the stock pays around 1.85%, has a payout rate of less than 20% and a fortress balance sheet. There is nothing not to like about this stock. As for stock prices, we expect support to form a nice base around $ 61.50 before regrouping to rise again. And one more thing, the company has just approved a $ 500 share buyback program that will certainly help keep the price movement on the rise in the coming quarters.

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