GMTN's IPO was at a much higher price. Management bought significant amounts of shares at that time at $16/share.
I agree that there's no firm reason to see GMTN's business as better positioned than TSA or another such company. The key drivers here are the low (price / tangible book ratio) of about 0.8 and the low (price / sales) ratio of about 0.2.
The company is growing quickly, which explains some of the inventory build. Also, the business is extremely cyclical, with most of the sales and profits in Q3 and Q4. This explains the remainder of the inventory build. Q1's results will be terrible, as they were last year due to this cyclicality.
You're right to say that the inventory is a key driver of the book value. There is some risk here. A mitigating factor is the fact that, at $641M this year, revenue was nearly twice the Q3 inventory amount of $329M. While two turns of peak inventory per year is not all that impressive, it does mean that the company is doing a decent job in its cash cycle. It also renders less likely the prospect that the company has lots of old inventory lying around that will need to be discounted.
I wouldn't characterize GMTN as a clear buy. Not much is these days. In particular, I'm concerned about the company's floating-rate debt in a rising rate environment, its debt-financed expansion and the fact that its products are discretionary expenditures.
The buy case on the stock revolves around reversion to the mean. If you believe management isn't completely lying/wrong about 2004 being hurt by unseasonable weather, the company could generate net margins in the 3% range (a typical number in this industry), which at current revenue levels would be about $19M or $1.25 per diluted share, for a P/E of 7.5 at a stock price of $9.40. The case gets even better if you believe the CEO knows how to grow a retailer from his experience at Home Depot. There are other hidden pluses too, like Net Operating Loss Carryforwards in the $40M range which are currently written down to zero but don't actually expire until 2021.
Briefly, on the issue of catalogs and the internet, raised by another poster, GMTN's catalog business shut down in 1996. The company's store strategy seems smart to me - like Home Depot they focus on functionality rather than cute displays. Also, the company sells a lot of guns, and I believe you have to have a physical presence for that (can you buy a rifle from a catalog?)
I'd be very interested if anyone on this board actually lives near a GMTN store (in the midwest region, some in the east coast too). Some firsthand research might be helpful.
Paul, I appreciate your comments about my past posts. If you'd like to discuss ideas off the board (via email and/or phone), I'd be happy to. Frequently I limit my posts because I want to avoid competition for purchasing small undervalued stocks. |
