Some of the world's most celebrated investors have made their names chasing bargains and following a value investing philosophy.
The aim is to buy companies which sell below their intrinsic value and for the market to recognise that value sometime in the future.
Financial service company FlexiGroup Limited (ASX: FXL) has lost almost 30% of its market value over the last 12 months. Here's how it stacks up for bargain hunters:
What FlexiGroup does
FlexiGroup provides a range of different financing options to consumers and businesses, creating a valuable bridge between buyer and seller.
The company has valuable arrangements with retailers JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) and is known for its offer of 'interest free' finance.
Consumer lending contributed just over 50% of 'cash' Net Profit After Tax (NPAT), while the company's business leasing divisions made up the rest.
Why is it cheap?
FlexiGroup currently sells for less than 10x its annual earnings, compared to 14 for the wider financial sector (according to Reuters) and 22 for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO). It's an attractive offer for value investors especially when combined with the current dividend yield of 6%.
The beaten-down share price is likely being driven by three factors;
- A weakness in financial stocks. The S&P/ASX 200 Financial index (excluding Australian Real Estate Investments Trusts (A-REITs) has dropped 20% in the last 12 months
- Concerns the local economy will deteriorate further, increasing risk of higher payment defaults and impairments
- Slowing organic growth with business and consumers spending less
Is there value?
There's no doubt FlexiGroup's financial performance is squarely tied to the economic cycle, so it would be a considerable risk to future earnings if the economy starts to tank.
However in my view at the current share price a lot of the doom and gloom is being factored in. The company is in good operational shape, generating strong cash flows and delivering a 19% return on equity for the half year to 31 December 2015.
I am also sceptical of companies which require acquisitions to grow, but the recent purchase of Fisher and Paykel Finance does align closely with its existing business and expands its geographic exposure, propping up its outlook.
This adds just enough shine to make it an enticing offer for value focused investors with a preference for dividends.
