One of the cheapest stocks in our Canada All TSX Stock Screener is Indigo Books & Music Inc. (TSE:IDG).
Indigo Books & Music Inc. (Indigo) is a Canada-based book, gift and toy retailer. The company operates stores in approximately 10 provinces and a territory in Canada, and offers online sales through its indigo.ca website. It operates approximately 90 superstores under the banners Chapters and Indigo, and approximately 120 small format stores under the banners Coles, Indigospirit, SmithBooks and The Book Company.
A quick look at the company’s share price history of the past six months (below) shows that the stock is down 14% but here’s why Indigo is currently undervalued.
If we start with the company’s latest balance sheet, dated March 2017, we can see that Indigo has $229 Million (CAD) in cash and cash equivalents, consisting of cash $129 Million (CAD) and short term investments $100 Million (CAD). Further down the balance sheet we can see that the company also has no debt. That leaves Indigo with a net cash position (cash and cash equivalents minus total debt) of $229 Million (CAD).
When we consider that the company has a current market cap of $402 Million (CAD) that means when we subtract the $229 Million (CAD) in net cash, Indigo has an Enterprise Value of $173 Million (CAD).
Now, if we take a look at the company’s latest income statement, dated March 2017, we can also see that Indigo generated $25 Million (CAD) in trailing twelve month operating earnings which equates to an Acquirer’s Multiple of 6.92, or 6.92 times operating earnings. What should also be remembered in terms of the company’s valuation is that Indigo currently has tangible book value per share of $13.55 (CAD), and with its current share price of $15.76 (CAD) that means the company is trading on a P/B of 1.1.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
While Indigo has a very strong balance sheet the company is also a powerhouse when it comes to generating free cash flow. A quick look at the company’s latest cash flow statement, dated March 2017, shows that Indigo generated $36 Million (CAD) in trailing twelve month operating cash flow compared with capex of $20 Million (CAD). That equates to $16 Million (CAD) in trailing twelve month free cash for a FCF/EV Yield close to double digits.
Some analysts will argue that the company’s net profits are down to $21 Million (CAD) for FY2017 from $29 Million (CAD) for the previous corresponding period but here’s a quick summary on the financial history of Indigo.
This is a company that has grown its revenues from $892 Million (CAD) in FY2013 to the current levels of $1.020 Billion (CAD) in FY2017. In FY2017 the company also generated gross revenues of $454 Million (CAD) and operating revenues of $25 Million (CAD), the highest in the company’s history. Indigo has shown a remarkable turnaround in the past five years considering the company had FY2014 losses of $31 Million (CAD) and FY2015 losses of $4 Million (CAD).
In terms of comparisons with FY2016, closer inspection of the company’s annual income statements shows that Indigo actually generated $22 Million (CAD) in income before tax for FY2016, then the company recorded a tax loss of $6 Million (CAD) which equated to net profit of $29 Million (CAD). Compare this with the $29 Million (CAD) recorded in FY2017 in income before tax, then the company paid tax of $8 Million (CAD) which resulted in net profit of $21 Million.
To summarize, Indigo is a great turnaround company that is operationally efficient. The company has a strong balance sheet and ability to generate solid free cash flow. Indigo has significant cash reserves of $229 Million (CAD) in cash and cash equivalents and zero debt and the company is generating historically high revenues, operating profits and margins.
Indigo remains clearly undervalued inspite of the 14% drop in its share price over the past six months. The company is currently trading on a P/E of 20 compared to its five year average of 71, a P/B of 1.1, a FCF/EV Yield close to double digit, and an Acquirer’s Multiple of 6.92, or 6.92 times operating earnings. All of which adds up to a bargain.
About The Canada All TSX Stock Screener (CAGR 19.1%)
Over a full eighteen-and-one-half year period from January 2, 1999 to June 16, 2017, the Canada All TSX screen screener generated a total return of 2,536 percent, or a compound growth rate (CAGR) of 19.1 percent per year. This compared favorably with the S&P/TSX Composite TR, which returned a cumulative total of 232 percent, or 4.7 percent compound.
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