Saturday, June 19, 2010


I see that HMV was up 8% yesterday. HMV has been a real dog, down from 110p a year ago to 62p now (after the rise yesterday). HMV is, as everyone knows, a retailer of records, books, and suchlike. Oh HMV, how could it have gone so wrong? Could we be buying into a sucker's rally, or is there still value to the shares? Below, I argue that the price of the shares is too cheap.

Here's some numbers:
Mkt cap: £262m
SP: 62p
Yld: 11%
Div cover: 1.7
Int cover: 9.6

Various stats
Now   Avg
Turnover  1956 1824
Op Profit   70  100
EV/Sales  0.18 0.40
PE         5.0 11.0
EPS         11 10.8

So, on the basis of EV/Sales, we could expect a doubling of the company share price. On the basis of PE ratios, the fair value would be 118p (=11.0 x 10.8), which, again, is about double. Brokers estimate rising forecasts (13% growth next year, 6% thereafter).

The yield looks very good, and hopefully safe, especially in light of forecasted profit increases. Even if they were to halve the dividend, that would still be very good. I don't see why they would need to suspend the dividend, certainly not at this point in time, anyway.

Now, OK, there's a fair bit not to like about HMV. The particular worry is that it's a niche retailer where the internet is threatening to obsolete its business. So, I wouldn't necessarily hold out for the shares to double, because I think it's likely that the nature of business has changed; but there would be quite a lot of margin for error if one decided to sell out at a 50% gain from here (assuming that such a thing happens, of course).

Footise is at 5240.

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