Mr Price trading update

Byron's beats. Senor Price, or just plain old Mr. Price is roaring ahead. You know the expression, cheap for a reason? Turns out the opposite in the case of the equities market is sometimes true too, expensive for a reason. About to turn cheaper.


Last week, if you were paying attention and keeping up to date with market happenings by reading Sasha's note you would have seen his little piece on Mr Price whereby he highlighted some extraordinary moves in the stock. For the sake of those who were holidaying here is what he said. "On the local front came a mystery of sorts in the form of Mr Price having a great day, no sale on the shares, which on a slow day traded more than double their usual quota and up five percent on the day. Tells me that something is afoot."

This morning they released a sens announcement which pretty much explains these Friday moves (obviously some insider leaks taking place). Basically the company is cooking and released an earnings forecast for the 53 week trading period ended 2 April 2011 with a headline EPS growth of 48%-53%.

This fantastic growth was attributed to a 13% increase in retail sales, lower mark downs and improved resourcing which improved margins and tight expense control. Well done management.

Let's look at the numbers. Last year the company reported headline earnings per share of 276.9c (52 weeks). That was off a growth of 21% from the year before. So if they manage to grow this number by 50% they would be expecting 415.4c for the year end. The stock trades at R67.90 and a forward PE of 16.3. Sounds fair to me.

Investment case for Mr Price. I will disclose that I love the stock and think the company is perfectly placed for our up and coming middle class.

They offer fantastic value for money and their product buyers have proved year in and year out that they can make the right choices. At a PE of 16 I would consider that on the cheap side considering the companies track record to grow as well as their prospects for international expansion. They also have potential to enter the credit market, especially with their Home division, with more than 80% of their sales consisting of cash.

Investment case against Mr Price. Their biggest risk lies with the authorities and importing textiles. Our government seems adamant to try and keep our textile industry alive by implementing tariffs for imports. I'm not too sure how Mr Price do it but apparently it involves imports into Swaziland and then into SA. If you have more knowledge on the process please let me know. Anyhow cheap imports are vital for Mr Price's business model and their competitive prices. Their shift to becoming more of a credit retailer can also pose a risk if things don't run smoothly.

All in all the risks would not be enough to deter me from the potential gains the company may benefit from.