When stocks rise significantly in a short period of time, investors must re-evaluate their investment, as sometimes stocks get ahead of themselves and the risk/reward relationship gets out of whack for that very reason. Let’s evaluate Sleep Country Canada Holdings Inc. (TSX:ZZZ), which has seen its stock price rise to 52-week highs.
Sleep Country is an interesting company that has a $1.3 billion market capitalization. It has performed well over the last few years, both in terms of stock price and business performance. The stock has a one-year return of 78%, which reflects the strength in the company’s performance during this time and the promise of its strategy.
The company’s margins are top tier, as are its return on equity (ROE), return on investment (ROI), and return on capital (ROC). In the latest year, the company reported an ROE of 20%, an ROI of 12.7% and an ROC of 11% — all really strong numbers for any industry.
The company reported 2016 results that were very impressive and top notch; revenue increased 14.8% to $523.8 million due to a 10% increase in same-store sales and the addition of 11 stores. The company’s strategy has been to open new stores in select markets as well as to increase sales of accessories and renovate existing stores. This strategy is clearly paying off.
Back to the question at hand. Are the shares overvalued or is there room to go higher? Well, the retail industry is in the process of a shift; successful retailers are making it, despite the changes taking place, while others are forced into bankruptcy and struggling with mounting losses.
Target Corporation left Canada a couple of years back, and now Sears Canada Inc. (TSX:SCC) seems to be on its way out, as losses have continued to mount and the company expects the fourth quarter of 2016 to be another awful quarter. Sleep Country is surviving and thriving in this environment, and this says a lot about the company and its prospects going forward.
The shares are valued on the high end and trade at a price-to-earnings ratio of 26 times last year’s earnings, which increased 29.5%, and 21 times next year’s consensus expected earnings, which are expected to increase over 15%. The company has beat expectations in all of the last four quarters, which says a lot about how management continues to outperform.
While the stock’s valuation is on the high side for a retailer, the company has grown significantly over the last few years, and I would expect that this momentum will continue. The company also pays a dividend and has a dividend yield of 1.76%.
