Billionaire Ken Griffin Is Dressing To Impress

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Billionaire investor and founder of Citadel Investment Group increased his stake by 240% in the clothing retailer Express (NYSE: EXPR), per a 13G filing earlier this month. At the end of the third quarter, Citadel owned 1.41 million shares, and now owns 4.8 million shares or 5.6% of Express' outstanding shares. The stock is up 20% already this year after upping its full year 2012 (ending Feb.) outlook, but I tend to agree with Griffin that there is still room for the stock to go higher. Fellow billionaire Jim Simons is invested in Express alongside Griffin (check out other hedge funds loving Express).

Despite the stock's strong performance year to date, it is still trading around 30% below its 52-week high. The retailer's third quarter numbers came in weak, with EPS of $0.20 compared to $0.37 for the same quarter last year, which has pressured the stock price. This was on the back of 5% lower comp sales and 4% lower revenue year over year. The uncertainty and weakness for the entire industry is related to continued weakness in discretionary spending. Notable clothing retail competition for Express includes the likes of Nordstrom (NYSE: JWN), Fifth & Pacific (NYSE: FNP), Guess (NYSE: GES) and Aeropostale (NYSE: ARO)

In trying to better understand what intrigues billionaire Ken Griffin and drives his Express investment thesis, it appears that both valuation and growth play a part in making the company a compelling investment opportunity (check out Ken Griffin's portfolio).

Express is the cheapest among its peers on a forward price to earnings basis, and one of the cheapest on a price to sales: 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Express</strong></p> </td> <td> <p><strong>Nordstrom</strong></p> </td> <td> <p><strong>Fifth & Pacific</strong></p> </td> <td> <p><strong>Guess</strong></p> </td> <td> <p><strong>Aeropostale</strong></p> </td> </tr> <tr> <td> <p>Price to Earnings </p> <p>(next year earnings)</p> </td> <td> <p>10.8</p> </td> <td> <p>14.1</p> </td> <td> <p>126.5</p> </td> <td> <p>11.4</p> </td> <td> <p>14.9</p> </td> </tr> <tr> <td> <p>Price to Sales</p> </td> <td> <p>0.77</p> </td> <td> <p>0.98</p> </td> <td> <p>1.14</p> </td> <td> <p>0.94</p> </td> <td> <p>0.46</p> </td> </tr> </tbody> </table>

The basis for buying. In looking closely at Express, it's easy to see why Griffin has decided to double-down, or in the case of its recent purchase, more than triple-down. The retailer saw better than expected holiday season performance, which has lead to a revision of full year 2012 and fourth quarter 2012 estimates. Full year 2012 comp sales are now expected to come in flat, versus the previous expectations of a decline in the low-single digits. The company upped EPS guidance:

<table> <tbody> <tr> <td> <p><strong>Company Guidance </strong></p> </td> <td> <p><strong>Previous</strong></p> </td> <td> <p><strong>New</strong></p> </td> </tr> <tr> <td> <p>Fourth Quarter 2012</p> </td> <td> <p>$0.62 to $0.68</p> </td> <td> <p>$0.72 to $0.74</p> </td> </tr> <tr> <td> <p>Fiscal Year 2012</p> </td> <td> <p>$1.47 to $1.53</p> </td> <td> <p>$1.56 to $1.59</p> </td> </tr> </tbody> </table>

All 11 analysts that follow Express have upped their EPS estimates for both the fourth quarter and for the full year 2012 over the last thirty-days. The average analyst estimates come to, fiscal year 2012 $1.70 and fourth quarter 2012 $0.74. 

 On a PEG (price-to-earning to growth) basis, Express is very cheap: 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Express</strong></p> </td> <td> <p><strong>Nordstrom</strong></p> </td> <td> <p><strong>Fifth & Pacific</strong></p> </td> <td> <p><strong>Guess</strong></p> </td> <td> <p><strong>Aeropostale</strong></p> </td> </tr> <tr> <td> <p>PEG Ratio</p> </td> <td> <p>0.63</p> </td> <td> <p>1.39</p> </td> <td> <p>--</p> </td> <td> <p>1.2</p> </td> <td> <p>1.66</p> </td> </tr> </tbody> </table>

The PEG ratio combines the valuation, which we have already established is "cheap," with the company's long-term expected growth (according to Wall Street analysts). The 0.63 PEG ratio of Express' suggests the company offers the best value with respects to how much investors are paying for the growth of the company. 

Margins for the company also remain well above industry standards: 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Express</strong></p> </td> <td> <p><strong>Nordstrom</strong></p> </td> <td> <p><strong>Fifth & Pacific</strong></p> </td> <td> <p><strong>Guess</strong></p> </td> <td> <p><strong>Aeropostale</strong></p> </td> </tr> <tr> <td> <p>EBITDA Margin</p> </td> <td> <p>15.13%</p> </td> <td> <p>14.45%</p> </td> <td> <p>3.21%</p> </td> <td> <p>10.35%</p> </td> <td> <p>6.80%</p> </td> </tr> </tbody> </table>

The return on equity is another place that Express towers over its competition. This is a great measure of how the company has put investor capital (equity) to work: 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>Express</strong></p> </td> <td> <p><strong>Nordstrom</strong></p> </td> <td> <p><strong>Fifth & Pacific</strong></p> </td> <td> <p><strong>Guess</strong></p> </td> <td> <p><strong>Aeropostale</strong></p> </td> </tr> <tr> <td> <p>Return on Equity</p> </td> <td> <p>44.90%</p> </td> <td> <p>35.20%</p> </td> <td> <p>-77%</p> </td> <td> <p>17.90%</p> </td> <td> <p>14.86%</p> </td> </tr> </tbody> </table>

Valuation. Next to Express, Guess is one of the cheapest clothing retailers. However, Guess has sub-par margins, return on equity and growth prospects, so this retailer is for a reason. Express trades at a 10.8 forward price to earnings ratio, where its 5-year average P/E ratio comes in at 11.75 times. Meanwhile, the peer average from above (excluding Fifth & Pacific) is around 13.5 Express gets the recognition it deserves and sees multiple expansion over the next year to 13.5, based on 2013 EPS estimates, the company could see over 20% upside. With industry leading margins and return metrics, coupled with its 'cheap' valuation, I tend to be on Griffin's side when it comes to possibly adding Express to my portfolio (check out Ken Griffin's newest picks)

mhargra has no position in any stocks mentioned. The Motley Fool recommends Guess?. The Motley Fool owns shares of Aeropostale and Guess?. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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