One of the biggest stories of Tuesday's trading was the news Macy's (M) is closing 150 of its stores over the next three years. Fifty closings will come in 2024, with the remaining 100 in the 24 months after that.
The closures are part of the company's focus on luxury buyers through its Bloomingdale’s and Bluemercury brands. Part of its strategy includes opening 30 smaller stores that aren't in malls over the next two years.
At the same time, it continues to fend off activist investors. It turned down a $6 billion bid in January. The troubles facing department stores don’t seem to want to go away.
Two companies that are doing much better are Groupon (GRPN) and Modine Manufacturing (MOD). Both are Barchart.com Top 100 Stocks to Buy. Both have share prices up more than 100% over the past year.
The question to answer: Which is the better buy?
Here’s my two cents.
Groupon’s Come a Long Way
Groupon is currently ranked 11th in the top 100. Its weighted alpha is 276.00, while its shares are up 148% over the past 52 weeks. This suggests that the shares are accelerating higher. They’re up 35% over the past month.
What’s going on with the online provider of daily discount deals?
The last time I checked, it was trading and single digits. As recently as November, it was below $10. In May last year, it hit a five-year low of $2.89. It’s up 535% in the nine months since.
In January, Groupon provided investors with a business update, saying that Q4 2023 revenue and adjusted EBITDA would be at the high end of their guidance for the year. In addition, free cash flow would be positive.
In 2024, it expects revenues to be flat to 5% lower over 2023, with $90 million in EBITDA at the midpoint of its guidance, with positive free cash flow for the entire year.
Through the first nine months of 2023, its revenue was $377.2 million, 16% less than a year earlier. Its adjusted EBITDA through the first nine months was $28.5 million, considerably better than -$9.8 million in the first nine months of 2022.
Its 2024 results are going to be much better than in 2023.
At the same time as the update, Roth MKM analyst Sean McGown reiterated his Buy rating with a price target of $28, 53% higher than where it’s currently trading.
“We believe that a year from now, the stock will trade at an EV/Revenue multiple of at least 1.2x our 2025 revenue estimate of $599M, and an EV/EBITDA multiple of at least 4.8x our 2025 Adjusted EBITDA estimate, which supports our $28 price target,” The Cantech Letter reported McGown’s note to clients.
While the business is getting stronger, it has yet to figure out how to get revenues and profits growing simultaneously. That may come in 2025.
Climate Change Keeps Modine Busy
Modine is currently ranked 16th in the top 100. Its weighted alpha is 255.4, while its shares are up 270% over the past 52 weeks.
If you haven’t heard of Modine, it provides heating and cooling solutions, including HVAC, commercial vehicles, data centers, agriculture, construction, and refrigeration.
The company’s shares are doing well because of its transformation into higher-growth, higher-margin businesses such as data centers. As a result of this transformation, it delivered record results in fiscal 2023 (March year-end), with revenues of $2.30 billion, 12% higher than 2022, with adjusted earnings per share of $1.95, 59% higher than a year earlier.
Regarding the balance sheet, it reduced its net debt by $47 million to $286 million in the past year, or just 6.1% of its market cap. It could pay down some of its debt because it generated a record operating cash flow of $215 million, double its cash flow a year earlier.
Although it emphasizes an 80/20 operating principle and leans toward organic growth, it is also keen to make strategic acquisitions that accelerate its future growth.
On Feb. 26, it announced the acquisition of Calgary-based Scott Springfield Manufacturing, a leading manufacturer of air handling units (AHU).
“The acquisition is right in line with our transformation and will bring Modine a product line and customer base in high-growth markets that fully complement and expand our current reach, including to hyperscale data center operators,” stated Modine CEO Neil D. Brinker.
The enterprise value of the transaction was $190 million. Scott Springfield’s revenue in 2023 was approximately $100 million, so it’s paying 2x sales, including the assumption of debt.
Only four analysts cover MOD stock. However, all four rate it a Buy, with the highest target price of $98, about 10% higher than where it’s currently trading.
The Verdict
While the two companies have similar EBITDA margins, Modine’s potential sales and profit growth are considerably better than Groupon’s.
In fiscal 2024, Modine expects sales to grow by 4-7% over 2023, with adjusted EBITDA growth of 46% year-over-year over 2023, to as much as $313 million, a margin over 12%, considerably higher than this past year.
Based on the analyst EPS estimate for fiscal 2025 of $3.74, Modine stock trades at a reasonable 24x those earnings.
Kudos to Groupon for improving its business, but Modine remains the better buy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
