Express Is Undervalued Based on Expectations for Positive Cash Flow

Stocks to buy

Things have really started turning around for Express (NYSE:EXPR), the fashion-forward clothing chain that sells online and in stores. For one, EXPR stock is now up over 400% year-to-date (YTD). On Jul. 15, it closed at $4.79.

the storefront of an Express store in a mall

Source: Helen89 / Shutterstock.com

In fact, the stock is even up 68% from its recent mid-year low close of $2.85 on May 12. Investors can now probably expect to see EXPR stock up at least 100% from here to $9.58 or even higher over the next year.

That is based solely on the turnaround in its cash flow. In other words, by becoming cash flow positive, the company won’t have to raise further capital and can begin to pay down some of its debt.

EXPR Stock: The Turnaround at Express

On Jun. 3, Express reported strong growth in revenue and earnings for the quarter ended May 1. Sales were up 64% over the same period in 2020 to $346 million. What’s more, Express said there was an “inflection point” in sales after Easter.

The company also said that “Q2 2021 store sales plus demand to date now [exceed] […] 2019 on a comparable basis.” Additionally, it said that Q1 operating cash flow was $130 million higher than a year earlier.

In fact, Express now also expects positive operating cash for the upcoming quarter ending Jul. 31. In addition, the company expects that it will have positive EBITDA (earnings before interest, taxes, depreciation, and amortization) in its fiscal Q3 and Q4.

As I pointed out in my last article on EXPR stock, this is not the same thing as positive cash flow — but it’s close. For example, analysts are still expecting negative earnings per share (EPS) of 79 cents for the year ending January 2022. In addition, analysts still see negative 6 cents EPS for the year to January 2023.

However, the markets won’t wait until January 2023 to see if this company turns profitable. Instead, they will likely push the stock in anticipation of this happening.

Let’s say that the company makes a 5% free cash flow margin on sales for the year ending Jan. 2023. Analysts expect sales of over $2 billion by then. That will give the company $100 million in FCF for the year. So, we can use that estimate to project out the value of EXPR stock.

What EXPR Stock Is Worth

If we assume that Express can make $100 million in FCF next year, that means its present market value of $315 million is a good deal too low. That would give it about a 31% FCF yield (i.e., $100 million / $315 million). This is simply too high. The way it will fall is for the market cap (i.e., its price) to go higher.

So, for example, if Express’ market cap was $700 million (or roughly twice today’s level), its FCF yield would be 14.3%. But this is still a very high level and likely to fall further to at least 10%. As such, using a 10% FCF yield, the market cap would have to be $1 billion (i.e., $100 million / 10% = $1 billion).

This would put Express’s market cap at almost 3 times today’s stock price (i.e., $1 billion / $315 million = 3.17 times). That means that EXPR stock is actually worth $15.18 using the Jul. 15 close price (i.e., 3.17 x $4.79).

In other words, if Express makes just a 5% FCF margin by Jan. 2023, EXPR stock will be worth between $9.58 (double the present price) and $15.18 (roughly 3 times). The average is $12.38 per share, or 158% higher than the Jul. 15 close price.

Even if it takes a year and a half for the stock to rise to this level, that implies an annual return of 87.5% per annum. That implies that EXPR stock is now worth $8.98 per share.

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Read More:Penny Stocks — How to Profit Without Getting Scammed

On the date of publication, Mark R. Hake did not hold (either directly or indirectly) any position in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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