hhgregg (HGG) is a company that is growing quickly and profitably. But value investors don't like to pay for growth, since rosy expectations can result in an overpay. Fortunately for value investors, Mr. Market is pricing the value of hhgregg's growth at zero.
Of course, growth of the sake of growth doesn't help investors. If a company is simply retaining its earnings and investing it in low-growth projects (e.g. a store with an ROA of 1%), it will show EPS growth but it is not benefiting shareholders.
But that's not the kind of empty growth hhgregg is achieving. The company earns back the cash it invests in opening a new store in just three years, which has allowed hhgregg to generate a return on equity averaging over 20% over the last several years. And unlike a lot of other companies with high ROE, this company has room to grow. The electronics and appliance retailer has just 173 stores throughout the US, compared to Best Buy at 1340 and The Home Depot at around 2000. This year, hhgregg plans to grow its store footprint by 20% by entering the markets of Chicago, Miami and Pittsburgh for the first time.
The share price has taken a beating over the last few months as hhgregg has seen double-digit declines in same-store sales. This is due to lower-than-expected consumer demand for 3D televisions and certain government stimulus effects from the prior year period that have expired. These temporary problems are potentially allowing shareholders the opportunity to buy a profitable franchise with strong growth opportunities at a P/E of less than 10. If you remove the company's cash balance from its market cap, HGG's P/E is less than 8.
Management, itself heavily invested in the company's shares, also appears to believe the share price is undervalued. It recently initiated a $50 million buyback program (representing more than 10% of the company's current market cap), which is a rare thing to do for a company that needs cash to grow. Just a couple of years ago, the company actually issued shares to help fund its growth, at a time when the company's P/E was a couple times higher than it is now. Management appears to understand the vagaries of Mr. Market, which should serve value investors well.
Paying a single-digit P/E for a well-managed company with profitable growth prospects is an opportunity most long-term oriented investors would jump at. hhgregg appears to offer just such an opportunity.
Disclosure: Author has a long position in shares of HGG