One of the cheapest stocks in our Small & Micro Cap Stock Screener is Kirkland’s, Inc (NASDAQ:KIRK).
Kirkland’s, Inc. (Kirklands) is a specialty retailer of home decor and gifts in the United States. The Company’s merchandise categories include wall decor, art, mirrors, lamps, decorative accessories, accent furniture, textiles, fragrance and accessories, frames, housewares, impulse and personal accessories, outdoor living and artificial floral products. The Company’s stores also offer a range of holiday merchandise during seasonal periods, as well as items carried throughout the year suitable for gift-giving. The Company’s average stores generally carry approximately 4,700 Stock Keeping Units (SKUs). The Company’s stores operate under various names, such as Kirkland’s, Kirkland’s Home, Kirkland’s Home Outlet, Kirkland’s Outlet and The Kirkland Collection. It operates approximately 380 stores in over 30 states, as well as an e-commerce enabled Website, www.kirklands.com. Its stores’ locations include Texas, Florida, California, Georgia, North Carolina, Alabama, Arizona, Virginia and Ohio
A quick look at the company’s share price history over the past twelve months shows that the price is down 38%, but here’s why Kirklands is undervalued.
(Source: Google Finance)
The following data is from the company’s latest financial statements, dated April 2017.
The company’s latest balance sheet shows that Kirklands has $60 Million in total cash and cash equivalents. Further down the balance sheet we can see that the company has zero debt. Therefore, Kirklands has a net cash position of $60 Million (cash minus debt).
If we consider that Kirklands currently has a market cap of $149 Million, when we subtract the net cash totaling $60 Million that equates to an Enterprise Value of $89 Million.
If we move over to the company’s latest income statements we can see that Kirklands has $13 Million in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 6.84, or 6.84 times operating earnings. That places Kirklands squarely in undervalued territory.
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.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Kirklands generated trailing twelve month operating cash flow of $51 Million and had $29 Million in Capex. That equates to $22 Million in trailing twelve month free cash flow, or a FCF/EV Yield of 25%. The company’s current free cash flow of $22 Million matches the previous five year high set in 2014. Something else which seems to be overlooked is that the Kirklands current revenue of $597 Million (ttm) is also a record high, as is its BVPS of $8.37 (ttm).
In terms of the company’s overall financial strength, all financial strength indicators show that Kirklands remains financially sound with a Piotroski F-Score of 6, an Altman Z-Score of 3.33, and a Beneish M-Score of -2.69.
With regards the company’s current valuation, Kirklands currently holds 40% of its market cap in cash. It is trading on a P/E of 17.3 compared to its 5Y average of 19.7**. It is difficult to understand why the P/E is so low when this same company traded on a P/E of 30+ back in February 2015. Kirklands has a FCF/EV Yield of 25% and an Acquirer’s Multiple of 6.84, or 6.84 times operating earnings. The company is currently generated free cash flow (ttm) that matches its 5Y high and has historically high revenues (ttm). All of which indicate that Kirklands is undervalued.
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