Is Myer a good investment?
"Did you hear that Myer is closing down?" the lady at the table next to us gossiped to her friends.
"No," one of the gossipers replied. "When?"
"Next year," answered the first lady.
It was typical of the kind of chatter I grew up with in my small home town (where the local Target Country store recently closed), so my ear naturally tuned in. But my family and I had been 100km down the road in the prosperous regional centre of Orange in central western NSW.
I have no idea if the rumour is true but it got me thinking about Myer from an investment perspective. I hadn't been following the story beyond the media headlines. The primary reason for my neglect was that Myer was floated in 2009 by a private equity company. And avoiding floats from such sources is a good rule of thumb in the sharemarket.
The numbers look promising but a household name faces big challenges, writes Greg Hoffman
Yet opportunities can arise when such businesses fall out of favour - and they often do. In fact, one of my better investments in recent years was former private equity float Collins Foods, which fell from a 2011 float price of $2.50 in to a low of $1 in 2012. At that point it represented a spectacular opportunity which I highlighted in this column in October 2012.
So I was interested in digging deeper and finding out if Myer might offer a similar opportunity. The initial signs were encouraging.
For its full 2014 financial year, Myer recorded a profit of $98.5 million, or 16.6c a share. With the shares trading around $1.40, that places them on a price-earnings (PE) ratio of less than nine times last year's profit. And last year's dividend of 14.5c represents an enticing fully franked yield of more than 10%.
Even with an expected deterioration this year in earnings and dividends per share (DPS) closer to 13c and 10c respectively, the PE ratio would be less than 11 and the fully franked dividend yield more than 7%. Such figures, combined with a household brand boasting more than 100 years of history, warranted a closer look.
The table shows the past five full financial years of sales, gross profit margin, rent (as a percentage of sales) and a common profit margin measure (earnings before interest and tax, or EBIT) as a percentage of sales.