While equity markets will remain volatile over the medium term, I continue to remind myself it’s “a market of stocks, not a stock market”.
By that I mean even in a bear market, or whatever this is, there are always companies globally and locally that are GROWING their sales, margins and profits. If you can grow your sales, margins and profits/dividends, all things being equal in a world where growth is getting harder to find, it should lead to share price appreciation over the medium term.
I invest on a structural growth at a reasonable price basis (SGARP). By that I mean I invest in sectors where I see structural growth tailwinds and then try to identify bottom up the single best company with leverage to that top down macroeconomic growth theme.
Last year I wrote to you about Baby Bunting (BBN), a newly listed Australian small cap company that I believed had all the attributes of a structural growth stock in a structural growth sector. The stock has performed well since that note. The very good news is that BBN has passed its first test as a listed company, materially beating prospectus forecasts and lifting forward guidance solidly. This is EXACTLY what you want to see from a structural growth stock and has further increased my confidence in the BBN management team and conviction in our shareholding in BBN.
Just to recap what BBN is: Baby Bunting is Australia’s largest specialty retailer of baby goods, aiming to provide customers with the widest range of products, high levels of service and low prices every day. The company was founded in 1979, operates 35 stores across Australia, with the leading specialty baby goods website by number of visits. The target market is parents-to-be, parents, friends and family, purchasing products for the 0 to 3 years age group. Principal product categories include prams, cots and nursery furniture, car safety, toys, babywear, feeding, nappies, manchester and associated accessories.
The great investor Peter Lynch (Fidelity Magellan Fund) said the best investment ideas you see with your own eyes in everyday life. I still believe that is very, very sound advice. As the father of two young children I feel well informed when it comes to the Australian baby goods sector. I have always thought it was a sector ripe for consolidation and a genuine dominant industry leader to emerge. Just think of this sector like the hardware sector 20 years ago, before Bunnings emerged on to the national scene. I genuinely believe BBN has the clear opportunity to emerge as that truly dominant player in what remains a fragmented and financially weak sector. The 1HFY16 result and outlook commentary confirm BBN is on track to become that dominant industry player.
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There is everything to like about the slide above. +30% sales growth, same store sales growth +9.2% and gross margin improvement. Other positives for the business include strong financial metrics (net cash on balance sheet), store rollouts on track, and a 10% lift in guidance. This all leads to the analysts, who cover the stock UPGRADING FY16 EPS +8% and FY17 by around +6%. The new consensus forecasts for BBN for this year, FY17 and FY18 are below. This confirms real growth in the forecast period.
[3]My view, as it was in my first note on BBN, is these forecasts will prove conservative and BBN will be in a multi-year earnings upgrade cycle driven by gaining further sustainable market share gains in addressable market of $2.3b in sales per annum.
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BBN also has a strong online offering which complements its bricks & mortar business. In the 1HFY16 www.babybunting.com.au [8] saw a +35% increase in website visits and +44% for the month of December year-on-year. There was a +48% increase in online sales on the pcp. Interestingly, BBN now has 115,000 Facebook followers, reminding you of the major structural change that is happening in advertising.
The rollout of stores continues at a good clip, with four new stores opened in 1HFY16 and two more expected in the 2H. BBN confirms a pipeline of new store opportunities has been identified for FY17, targeting four to eight new store openings per year. BBN identified 70+ trade areas based on demographic, location and competition parameters. 40% of remaining sites are in regional locations with populations greater than 200,000.
[9]The financials are all heading in the right direction and hopefully this is the start of a long period of structural growth and increasing cash generation.
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In terms of the near-term outlook, which is important in a medium-term structural growth story, BBN said that “strong trading has continued into 2H FY16 with year-to-date comparable store sales growth increasing to +11.2% as at January 31st 2016”.
As I mentioned above, BBN UPGRADED their FY16 guidance by around +9%, which led to consensus analyst upgrades for FY16, FY17 and FY18.
All in all, I am even more convinced this small cap company will become a mid-cap company over the next five years. They have the management skill and financial firepower to execute a strategy that gets to “category killer” status. It’s only early in the life of this public company but they are more than passing the test since listing.
Analysts have upgraded 12-month forward price targets to around $2.85, a level I think will prove conservative.
The Aitken Investment Management Global High conviction Fund has increased its holding in BBN around $2.50 since the solid 1HFY16 result and guidance upgrade, believing this story has a long-way to run and looks a classic situation of a top down structural growth (population growth, consumer spending), meeting a bottom leverage via organic growth and good execution.
With structural growth hard to find, I think BBN will be re-rated as more investors discover this story. I encourage you to look at this growth stock as I did six months ago. I am high conviction on BBN.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.