Party City reported 4th quarter earnings last week and the stock price had a rough day. Down 15% in one day and today they’re down another 4%. Revenue came in under expectations, but they hit the low range of their earnings per share guidance.
When you see one of your holdings go down 15% in one day, your initial thought is “what’s going on?” But after reviewing the 4th quarter results and reading through the earnings call transcript, I don’t think much has changed, and I basically think the same about Party City as I did when I purchased Party City at various points last year.
I first came across Party City last fall and was intrigued by the low PE. The low valuation intrigued me. I figured something must be wrong to justify this low PE, and the interesting thing was that when I went looking for what was wrong, I couldn’t find anything. And beyond not finding anything that was wrong, I was actually impressed by the company. I found a company that had a long history of making money, a company focused on growing, a company that was the biggest player in their field, and I also learned that they were more than just a retail company, they actually make a lot of product themselves. I talk about all those things in episode 3.
So the theory of the investment was, this is a healthy, growing company that makes money. It doesn’t make sense that it is valued at a PE of 5 to 7, shouldn’t it be selling for a higher, more normal PE of 10, 12, or something like that? I’m going to purchase a stake, monitor the business, see if it continues to grow, and hope that in a few years it has a higher, more normal valuation. So basically I saw a solid company selling for a cheap price and decided to buy.
And I was also encouraged to see on OpenInsider that CEO James Harrison was buying at similar prices.
And that’s all basically what I still think now. I was encouraged to see in the earnings transcript that the plan for 2019 is to take advantage of the better day for Halloween than this year (in 2019 it falls on a Thursday) and to pay down debt. And I also liked how in their third quarter earnings press release they announced a $100 million share repurchase program.
There also seems to be a helium supply issue that is hurting their balloon sales. They say in the earnings call that known helium reserves is not an issue, but that the problem is refining and transportation related. You have to think that it’s likely that within a few years the marketplace will figure out how to overcome this issue, meet helium demand, and get more helium to stores like Party City.
They expect adjusted earnings of around $150 million in 2019. The current market cap is $932 million. So a forward PE of 6. Why so low? I don’t really get why it’s being valued so low.
The possible share repurchases, the CEO buying, the small but still there sales growth, and the plan to pay down debt. I like all of it considering the low valuation.
And I like what they are doing business-wise in terms of how they are running their stores, trying to grow sales, etc. I also like the business in general. People are going to celebrate birthdays, graduations, Halloween, and all the other celebrations in life year after year. So for now I’m content to hold on, see how this plays out, and if prices drop further to a forward PE or 3 or 4, then maybe it’ll be time to buy some more.