Bear of the Day: hhgregg (HGG)

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March 04, 2013 |

Electronic retailing was once a lucrative business. Companies like Best Buy (BBY - Analyst Report) and RadioShack dominated the field and were known across the country by anyone looking for a TV, videogame, or computer.

However, with the rise of Amazon (AMZN - Analyst Report) and other e-commerce sites, many of these electronic retailers have become merely showrooms for online firms. This has allowed internet companies to poach sales from big box stores, and crater profits for brick-and-mortar companies that are drowning under high fixed costs.

 While most investors have focused in on the giants of the space, some relative newcomers, like hhgregg (HGG - Analyst Report), have also been impacted by the trends. In fact, the small electronic retailer has seen its share price tumble by about one-third in the past two years.

This is obviously a pretty depressing trend given that the broad market has been well into the green in the time period. However, it is worth noting that the stock hasn’t been going straight down, as HGG has added about 30% in the year-to-date time frame.

Some might think that this signals a return to prominence for electronic retailers, and that HGG is poised to lead the charge. I think, when looking at some of the fundamentals, that this recent surge is just a nice ‘dead cat bounce’ and a great time to get out of—or even short—this still-troubled retailer.

Terrible Estimate Picture

The firm posted solid results for 3Q last year, beating out analyst expectations by 22%. This wasn’t meant to last though, as the company performed in-line for the all important holiday season quarter, and estimates for upcoming quarters have been coming down across the board.

For the current quarter, two estimates have gone up while the other 10 have gone down. Meanwhile, current year forecasts are no better as there is universal analyst agreement downwards, with 11 of 12 estimates going lower in the past two month period.

This has pushed the current year consensus estimate down from 93 cents 60 days ago, to just 74 cents now. This is inclusive of a projected 18 cent loss per share for the next quarter, painting a pretty unfavorable picture in the medium term for this firm.

Other Factors

On the other hand, it is true that the company has a very low P/E and a below average PEG ratio. The company also has a lot of room to expand, especially if its once mighty competitors continue to struggle.

Still, this hardly makes up for the fact that many are questioning if the industry will even be able to survive, and some of the other negative factors hitting HGG’s stock. For example, the operating margin has been on the decline for the past five years, and it is now below 4%, while the net margin is below 3% suggesting little room for error.

If this wasn’t enough, the stock also has a Zacks Rank of 5 or ‘Strong Sell’, putting it into a group of securities that has historically underperformed the S&P 500 by a pretty wide margin. The stock also has a relatively unfavorable industry rank, and it possesses a Zacks Recommendation of ‘Underperform’ so the stock is viewed negatively by our team over the long haul as well.

So if one is willing to take a slightly longer term look, HGG could be a very interesting candidate to sell, and most definitely avoid, in long portfolios.  The company is in a weak industry and the earnings outlook isn’t favorable, so the recent jump in price could certainly turn out to be a mirage for many investors.

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