Brian Bolan

Bull of the Day: Conn's (CONN)

by Brian Bolan

December 11, 2013 |

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Conn's (CONN - Snapshot Report) just reported a strong quarter and worries of bad credit customers have been abated. The stock is the Bull of the Day as a Zacks Rank #1 (Strong Buy).

Beat and Raise

The company reported $0.71 in earnings vs. the $0.64 estimate. Revenue came in at $311M vs the $288M estimate. The company also guided higher. They see EPS of $2.75-$2.80 vs. the estimate of $2.60, so a big bump up. They now see same store sales increasing 22% - 25%, up from the prior guidance of 15% - 20%.

As the market looks to adjust to the beat and raise, the stock has continued to move higher. Since the beat, the stock is up about 25%.

Company Description

Conn's sells home appliances and furniture. As of September 5, 2013, the company operated approximately 70 retail locations in Texas, Louisiana, Oklahoma, New Mexico, and Arizona. Conn's, Inc. was founded in 1890 and is based in The Woodlands, Texas.

Earnings History

Of the last seven reports, the company has posted five earnings beats, one miss and reported in line one time. The miss is the big deal in that time line, so let's take a closer look at that.

The July 2013 quarter saw a miss of $0.08 or 13% below the Zacks Consensus Estimate. Revenue still came in well ahead of expectations but the stock plunged 22% in the session following the miss. The explanation was that given included a glitch that prevented the company from calling the customers that were close to or past due on payments. As a result, earnings took a hit.

It appears that issue has been handled.

Furniture

I touched on guidance already, but here is a little more. The company noted they expected $3.80-$4.00 for next year versus the estimate of $3.57 - again, another big bump higher. Management went on to say that "sales trend continued into November with retail sales expanding 49%. November same store sales rose 32%."

This is all music to my ears and the analysts agreed. Canaccord raised their price target to $88 as the furniture and mattress segment drove the outperformance. This segment growth should continue into the next quarter and drive gross margins even higher.

Earnings Estimates Moving Higher

In May the Zacks Consensus Estimate for 2013 was calling for EPS of $2.49 per share. That number ticked higher to $2.65 per share in August, but that was the peak, as estimates held still until recently. The recent beat and raise has estimates up to $2.77 for this year and a mega increase to $3.93 from $3.57 for next year.

Valuation

The valuation picture for CONN is pretty good considering the recent run up in stock price. The trailing PE of 31x is just above the 28x industry average, while the 27x forward PE is also just higher than the 26x industry average. The price to book multiple sports a very small premium with a 4.8x level vs a 4.5x industry average. Price to sales clocks in at 2.5x vs the 1.1x industry average and is the metric with the highest premium.

The Chart

The last few Bull of the Day articles that I have written haven't had a long term chart quite like CONN. The price and consensus chart for this stock is just great. The stock and earnings are very tightly correlated and as the estimates increase, the stock is sure to follow. If you believe that earnings are what drives stocks, then the price and consensus chart for CONN shows this stock headed for triple digits.

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.

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