Card Factory (LSE:CARD) is an income stock that most people are probably familiar with. It operates over 1,000 card and gift stores in the UK and Ireland having opened its first one in Wakefield in 1997. It listed in May 2014.
Is it really an income stock?
Not surprisingly, it suffered during the pandemic when it was forced to close its stores. To preserve cash, it cancelled its dividend and only resumed paying one again in June 2024.
On this basis, perhaps I’m a little premature calling it an income stock. After all, there are some UK shares that have been paying dividends for over 50 years, including a small number that have increased their payouts every year for five decades.
However, based on its dividend payments over the past 12 months, the stock’s currently yielding 4.7%. There are plenty of bigger companies — its market cap is currently (1 August) around £360m — yielding far less.
Is it cheap?
But I also think there’s some real-world evidence to suggest that the stock might be undervalued.
That’s because it’s just announced that it’s bought funkypigeon.com — the “online personalised card and attached gifting business” — for £24m.
This is equivalent to approximately five times EBITDA (earnings before interest, tax, depreciation and amortisation). Apply this multiple to Card Factory – its EBITDA for the year ended 31 January 2025 (FY25) was £127.5m – and it would be valued at £637.5m. This is 77% more than its current stock market valuation.
Analysts also appear to believe that the retailer’s shares are undervalued. They have an average price target of 150p – this is a 46% premium to today’s value.
Prior to the acquisition, analysts were forecasting earnings per share of 15.17p for FY26. The stock’s therefore trading on a forward multiple of 6.5, which seems very low to me, even for a retailer. Looking ahead to FY28, the multiple drops to 5.5.
What else?
If I’m honest, I’m struggling to understand why the stock, on paper at least, appears so cheap. I’m concerned that I might have missed something.
However, on reflection, it’s probably due to concerns about the long-term viability of the market in which it operates. Sending cards could be a thing of the past.
Also, operating physical stores isn’t easy. Commercial rates place the group’s business model at a disadvantage in one respect to an online-only operation.
But that’s why it’s decided to buy funkypigeon.com. Although it’s not expected to be “earnings enhancing” until FY27, it plans to use its IT platform to compete in the direct-to-recipient card and gifting space.
Card Factory operates a vertically integrated business model, which means it designs, manufactures and sells many of its products. This helps it capture more of the profit in the supply chain and enables it to undercut its rivals.
The UK celebrations market is worth £13.4bn. If the group can move with the times and capture more online sales then it should aid the future-proofing of its revenue and earnings. There are plenty of examples of UK high street retailers that have successfully managed to embrace the internet and used it to complement their physical stores. I think Card Factory could be another example. For this reason — and due to its attractive valuation — long-term investors could consider taking a position.
