2024 December Stock Ideas
With FY24 out of the way, here is a list of 3 undervalued stocks we are watching for FY25. Be careful though and do your own research as those stocks trade at a discount for a reason and require certain catalysts for multiple re-rating. Without further ado lets dive in:
1. Leslie’s ($LESL) - Market Cap: $ 395M
The business
Leslie's is the largest direct-to-consumer pool and spa care brand in the United States. It operates over 1,000 physical locations and e-commerce platforms, selling a wide array of supplies and services including chemicals, equipment, parts, and cleaning accessories. Leslie's serves both residential and professional clients, with a significant portion of sales coming from DIY customers.
The company has a vast store network located within 20 miles of 80% of US pools; a strong loyalty program with 8 out of 10 DIY customers as members; and exclusive brands and custom-formulated products, accounting for over 55% of total sales.
From FY18 to FY24, the company achieved a revenue Compound Annual Growth Rate (CAGR) of 6.9% while its operating income declined from $116 million (13% operating margin) to $67 million (operating margin of 5%). Leslie’s has debt and lease liabilities of $1.05 billion compared to cash and short-term investments of $109 million.
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Valuation multiples
Its stock price is $2.14 with a 52-week high of $8.21 and a 52-week low of $2.02. The stock price year-to-date (YTD) performance stands at negative -69%.
Leslie’s trades at an EV/EBITDA (NTM) of 10.7x (4 Year average of 14.8x) and at an EV/Sales (NTM) of 1.0x (4 Year average of 2.5x).
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Challenges
Leslie's stock has collapsed by 90% since its IPO in 2020, primarily due to a confluence of post-pandemic challenges. The company benefited from a pandemic-fueled boom in pool installations and increased spending, but this was followed by a normalization of demand, higher interest rates, and a reduction in consumer spending on large-ticket items. Additionally, supply chain issues and a chlorine shortage led to price increases, which subsequently reversed, negatively impacting sales and profitability.
Inventory build-up and misjudged chemical pricing by the former management team further exacerbated the issues. Consequently, Leslie's gross margin fell from a peak of 41% in FY21 to 35.8% in FY24 and total revenue in FY24 decreased by 15% from its peak in FY22.
Furthermore, high debt of $777 million compared to cash and short-term investments of $109 million creates a challenging financial position.
Catalysts
Despite the recent challenges, several catalysts suggest a potential for stock appreciation. First, comparable sales have shown improvement in Q3 and Q4 of FY24 and management has guided for further improvement in Q1 FY25. Second, the professional (PRO) consumer group is demonstrating resilience, with increasing sales, and the company is converting more stores to the PRO format to capitalize on this trend. Third, chlorine prices have stabilized, and inventory has been reduced, helping to normalize the impact of prior pricing actions and reduce storage costs. Finally, new management with extensive experience is in place, focused on operational improvements and cost reduction.
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