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Savings Experiment: Snow RemovalIn his Half-Priced Stocks newsletter, value investor Nathan Slaughter recently assessed stocks based on the general investment philosophy of Benjamin Graham, the noted value investor under whom Warren Buffett studied.
One issue that stands out in his view is Cabela's (NYSE: CAB), one of the world's largest specialty retailers of hunting and fishing gear, camping equipment, and outdoor apparel.
"The cornerstone to Graham's success and his enduring legacy to value investors was his 'margin of safety' concept. Specifically, he would take a hard look at dividend yields, price-to-book ratios, and other key metrics.
"Cabela's originated as a direct marketer and once primarily sold its products via catalog, but has since augmented that distribution channel with e-commerce operations and a growing chain of nearly 30 stores spread throughout 19 states.
"Cabela's offers an unrivaled selection of more than 225,000 items that other competitors just can't match. Last year, the company took in a record $2.4 billion from shoppers and churned out net income of $88 million, or $1.31 per share.
"Digging into the latest balance sheet, we can see that the company ended fiscal 2007 with short-term, easy-to-liquidate assets totaling just over $1 billion. And when long-term assets like land held for development are figured in, total assets rise to $2.2 billion.
"And keep in mind, property and other assets are usually listed on the balance sheet at prices reflecting what the company paid, less any depreciation. Quite often, that amount can be substantially below the going market rate.
"After subtracting total liabilities of $1.4 billion, we are left with shareholder equity of $828 million, for a book value of $12.47 per share, versus a current stock price of $14.20. In other words, Cabella's is trading at just 1.1 times book value -- exactly half of the industry average of 2.2 and a far cry from the S&P 500 average of 3.9.
"And with analysts expecting profits to hit $1.33 per share this year, the stock is also trading with a forward P/E below 11, again well below that of its immediate peer group.
"Cabela's growth rate and operating margins are respectable, but not glamorous. Still, the company is not being fairly valued by the market, and there are ample opportunities for improvement.
"On that front, management is making a deliberate effort to slow its expansion in order to tighten up results at its existing store base.
"And better inventory management, more effective advertising campaigns and other strategic initiatives recently implemented could lead to progress in the near future. Once those improvements make their way to the bottom line, the stock should begin hiking towards its $19 fair value."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
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