2020 Stocks: Is This 1 Stock the Ultimate Value Play?

Indigo’s share price has declined in recent years. Is this a good time to add it to an RRSP or TFSA?

| More on:
question marks written reminders tickets

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Indigo (TSX:IDG) is a Canada-based book, gift and toy retailer. The company operates retail bookstores across Canada which includes 89 full size stores under the Indigo and Chapters banner and 100 small format stores under Coles, Indigospirit, SmithBooks and The Book company banners.

The company reports a market capitalization of $118 million with a 52-week high of $11.73 and a 52-week low of $3.90

Intrinsic price

Based on my calculations using a discounted cash flow valuation model, I determined that Indigo has an intrinsic value of $7.39 per share.

Assuming less-than-average industry growth, the intrinsic value would be $7.04 per share, and higher-than-average industry growth would result in an intrinsic value of $7.79 per share.

At the current share price of $4.32, I believe Indigo is significantly undervalued. Investors looking to add a retail company to their TFSA or RRSP should consider buying shares of Indigo.

I would recommend following the stock and waiting until the end of 2020 as a correction in the market could allow investors to buy the stock at a cheaper price.

Indigo has an enterprise value of $202 million, which represents the theoretical price a buyer would pay for all of Indigo’s outstanding shares plus its debt. One of the good things about Indigo is its low leverage with debt at 0% of total capital versus equity at 100% of total capital.

Financial highlights

For the nine months ended September 28, 2019, the company reported a mediocre balance sheet with $17 million in negative retained earnings.

Generally speaking, negative retained earnings are a bad sign as it indicates the company has more years of cumulative net loss than net income.

This is not a large concern, however, as the company adopted IFRS16 recently, which led to the adjustment in retained earnings from $131 million to $22 million as at March 31, 2019. This has exacerbated the effects of a negative retained earnings.

The company reports $528 million in long-term lease liabilities and $43 million in short-term lease liabilities due to the adoption of IFRS16. With cash and equivalents of $47 million, I’m not concerned about Indigo’s ability to meet its short-term debt obligations.

Overall revenues are down from $422 million to $396 million as Indigo continues to adapt to a changing retail environment. Overall, net loss for this period is $40 million, down from $35 million in 2018.

The cash flow statement is quite ordinary with cash outflows of $33 million under financing activities related to principal and interest payments on lease liabilities.

Further, the company is reducing its capital expenditure spending with a reduction in purchases of PP&E from $38 million to $4 million.

This is a good decision on the part of management given the difficulties currently experienced by the bricks and mortar retail industry.

Foolish takeaway

Investors looking to buy shares of a financially stable retail company should consider buying shares of Indigo. The year 2020 will inevitably be a rough year for the markets, and I recommend investors wait for the ideal time to buy in.

Despite the company’s negative retained earnings, the company still boasts an intrinsic value of $7.39 —  a premium compared to the $4.32 at which the stock is trading at writing.

Further, management is committed to keeping non-essential spending to a minimum and has strategically reduced capital expenditure spending to reflect a changing retail environment.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chen Liu has no position in any of the stocks mentioned.

More on Investing

sad concerned deep in thought
Cryptocurrency

Elon Musk Buys Dogecoin: Should You?

Elon Musk is back to buying Dogecoin (CRYPTO:DOGE). Should you join him?

Read more »

analyze data
Dividend Stocks

2 Canadian Stocks at the Top of My Buy List

Here are two of the top Canadian stocks on my buy list, as the market uncertainty continues to plague Canadian…

Read more »

question marks written reminders tickets
Investing

Oil Stocks vs. Gold: Which Is Better for a Recession?

Gold is considered a good asset to hold in recessions, but oil stocks like Cenovus Energy (TSX:CVE)(NYSE:CVE) are doing better…

Read more »

gas station, convenience store, gas pumps
Investing

Is Alimentation Couche-Tard (TSX:ATD) Stock a Buy After Disappointing Earnings?

Alimentation Couche-Tard (TSX:ATD) had a challenging fourth quarter, but there are still plenty of reasons to like this stock long…

Read more »

Stocks for Beginners

Investing Strategies for Canadians in an Uncertain Economy

These are uncertain times, as the economy grapples with high inflation. Here are four investing strategies for the current market.

Read more »

Tech Stocks

These 3 Cheap Stocks Would Be an Excellent Addition to Your Portfolio

Given their attractive valuation and solid growth potential, these three stocks would be an excellent addition to your portfolio.

Read more »

money cash dividends
Dividend Stocks

TFSA Passive Income: 2 Top TSX Dividend Stocks to Buy on the Correction

These top dividend stocks look cheap to buy right now for a TFSA focused on passive income.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Stocks for Beginners

How to Start Investing in a TFSA in a Down Market

Are you interested in starting a TFSA during a down market? Here are a few tips to keep in mind.

Read more »