There’s been a lot of back-and-forth in regards to the valuation of Five Below (FIVE) the past couple of weeks. If you’re not familiar with the company, Five Below is a dollar store focus on teens and pre-teens, selling stuff between $1 and $5. Check out the site and you’ll have a good grasp of the concept.
There’s a battle going on amongst analysts and investors (and hedge funds who short stocks) in regards to FIVE. First, the company is in the midst of growing its store count from 323 at the end of lat quarter to management’s goal of 2000. Buy now and you’re buying into 323 stores, and your cut could someday be a portion of 2000 stores someday.
On the other hand FIVE is overvalued. Last quarter (when my charts and tables below were done) FIVE had a P/E of 44. That was when the stock was $40. FIVE is $36 today, and that makes the P/E 40. The problem is that’s still high for a company that had sales growth of 32% last quarter. There’s a detailed view of the bears case here.
One Year Chart
I like this company and would love to own the stock, so let’s check out the one-year chart. 40% profit growth was great last quarter, but the stock is in a long basing pattern and hasn’t made a run higher since late last year (and when it did the P/E shot past 50 which was way too high).
Estimates for the next four quarters show +27%, +40%, +34% and +29% profit growth coming. That’s great. Now let’s look for a better price to get in at.
Fair Value
I would like to buy in at 35 times earnings, and now that’s $32 a share. So FIVE needs to drop another 10% or so before I’d be interested in buying in.
Sharek’s Take
Five Below is a stock I want to but. My issue is I don’t want to overpay. This stock could be $40 next year and paying $36 for it doesn’t give me much upside. The dollar store sector is also weak right now, and although FIVE posted a solid same store sales increase of 6% last quarter, it guided this quarters estimate down to 3%.
In the end, this FIVE is still too high. I”l keep my eye on it, as this could be a stock to buy were the market to correct.
View the Earnings Table here.View the Profit History here.
View the Ten Year Chart here.
