Making investment decisions is harder than simply selecting the best businesses, because everyone tends to know what a good business looks like and value the shares accordingly. It’s a lot harder than looking at chocolate or vanilla, but the concept is quite similar.
So how does this apply to Kohl’s?
Great question. What you want to find out is whether or not the current valuation reflects an opportunity. If it trades in line with say Colgate-Palmolive Company (NYSE:CL), you’d likely have no interest.
Colgate-Palmolive is more “inevitable” than Kohl’s. Yet if it trades at half the value, things become more interesting.
Among the funds tracked by Insider Monkey, Kohl’s Corporation is not very popular as just 22 funds reported long positions heading into 2016, down from 29 funds a quarter earlier. In addition, the aggregate value of their holdings dropped to $289.85 million from $317.52 million during the last three months of 2015 and represented 3.20% of the company’s outstanding stock at the end of the year. David Harding’s Winton Capital Management reported holding 2.03 million shares in its last 13F filing, while Steve Cohen’s Point72 Asset Management initiated a stake containing 366,300 shares during the fourth quarter.
So let’s see if we can get a handle on what the security might be offering.
Earnings Are Down…
If you were to look up the recent “bottom line” results of Kohl’s Corporation (NYSE:KSS), you might be a bit alarmed.
In 2014 the company earned around $4.24 per share. Last year Kohl’s reported diluted earnings-per-share of $3.46 – or an 18% decrease. That doesn’t exactly give you a warm and fuzzy feeling. However, I would like to make a couple of points.
First, a portion of that decrease resulted from a loss incurred from the extinguishment of debt. It doesn’t make up the whole difference, but without this aspect the company’s earnings-per-share would have been closer to $4.01. Moreover, Kohl’s sold more stuff, had a higher level of sales per square foot and increased its store count during the year. So not all was bad.
The second item to consider is that the share price has certainly reflected the business uncertainties as of late.
…But So Is The Share Price
After reaching a peak of around $78 in the first quarter of 2015, Kohl’s shares are now trading around $43. That’s a 45% decrease in just over a year.
So sure, the underlying earnings power of the company decreased for the year – anywhere from 5% to 18% depending upon how you look at it. Yet the share price has gone way beyond this by nearly halving.
So the question becomes, which we’ll attempt to address shortly, whether or not the long-term business of Kohl’s is now half of what it was just a year ago or if the new share price could be offering something interesting.
In any event, even using the lower earnings-per-share figure, you had a company that went from trading around 18 times trailing earnings all the way down to just 12 times earnings.
With that in mind, let’s think about the potential for the company and security moving forward. For this illustration I’ll use a construct quite similar to the one used to outline the potential prospects of JPMorgan Chase & Co. (NYSE:JPM).
Past Growth
Before looking ahead, it can be helpful to see what has transpired in the past. This doesn’t dictate the future, but it can give you a reasonable prospective as far as what might be “within the realm of reason.”
Here’s a look at Kohl’s business and investment history from 2005 through 2015:
This is a rather interesting history, in my view. On the top line the business saw reasonable growth, coming in at just under 4% per year.
However, the quality of those sales have diminished – with Kohl’s profit margin dropping from 6.3% to 4.1% – and in turn, providing negative company-wide earnings growth. In 2005 the company made $842 million. Even using the adjusted figure for last year, the profits stood at just $781 million.
This is the sort of thing that I mean by a “second tier” type of investment. The company makes money every year, but it’s not a straight march upward like the Johnson & Johnson’s (JNJ) of the world.
