Beset by falling footfall to high streets, the spectre of rising wages and inflation, and the runaway success of e-commerce it’s little wonder that retailers aren’t in favour with most investors nowadays. But if we go beyond this grim generalisation and look at individual companies there are a few stellar retailers out there who are performing very well, even in this tough environment.
One of them is B&M European Value Retail (LSE: BME), which is growing quickly through like-for-like sales increases and expansion into previously untapped parts of the country. In the company’s Q3, which ended in mid-December, total sales rose an astonishing 20.5% year-on-year due to 34 new store openings in the UK, with a 7.2% jump in like-for-like sales growth.
While it’s normal for such high levels of like-for-like growth to moderate eventually, I believe the company will continue to post still impressive positive organic rises in the coming years. The main reason is that as a discounter it’s relatively recession-resistant and in some cases benefits from consumers becoming more frugal during economic downturns. I also reckon the company will prove largely immune to e-commerce pressures due to its relatively-less-affluent customer base and the low prices on its goods. How many people buy products costing £1 to £3 online?
Aside from strong counter-cyclical characteristics, I also love B&M’s growth potential. The company’s current estate covers 533 stores in the UK and 73 in Germany. There’s room for expansion in both countries with a medium-term target of 850 stores in the UK alone.
For a company that is expected to grow earnings by double-digits in each of the next three years its shares also look pretty cheap at 20 times forward earnings. With high growth potential, a good dose of recession-resistance and above average EBITDA margins of 9.3% I believe this is a very fair price to pay.
Banking on future growth
Another well-run company whose shares are starting to look cheap is challenger bank Virgin Money (LSE: VM). The FTSE 250 constituent’s shares currently change hands at 0.92 times book value. This means investors are discounting Virgin’s current assets and are pricing-in no growth in the near term.
This could well make sense given the cyclical nature of retail banks, but I’m not willing to ignore a fantastic company that looks undervalued and is out-performing peers and larger rivals. This is clear in the kind of statistics from year-end 2016 that would make management teams at Lloyds and RBS jump for joy. Statutory return on tangible equity rose to 12.4%, the cost-to-income ratio fell to 57.2%, and its asset base rose £5bn year-on-year to £32.1bn.
The key to this success is a management team that has assiduously cut the fat from the remnants of Northern Rock that it bought on the cheap from the government in 2011. The 57.2% cost-to-income ratio signifies there are still internal improvements to be made. Add-in plenty of growth potential due to market share of around 3.5%, and there’s significant room for future profit growth.
So, we have a growing bank with sector-beating profitability whose shares trade at less than bank value. Throw in huge dividend potential thanks to high capital ratios and rising earnings that cover current payouts by 5.7 times, and Virgin Money is one company I’d love to own in April and beyond.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.