Although innovative technology companies attract most of the attention of investors in today's stock market, there are also many less exciting companies with great growth opportunities that are trading at attractive prices. Two of these companies are sprouts farmers market (WKN: A1W2Q4) and nelnet (WKN: 911438).
Sprouts farmers market
Sprouts farmers market is a health-focused grocery chain with 363 stores in the U.S. Although the company offers a wide range of products, its design, reminiscent of a farmers market, with low displays and a product-centric layout, sets it apart from the rest of the grocery industry.
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At the beginning of 2019, sprouts began a new strategy introduced by recently hired CEO jack sinclair. The primary goals of this strategy are to rebuild the balance sheet, set the stage for rapid store expansion, and shift the customer base away from coupon clusters to health-conscious consumers. So far, that plan appears to be bearing fruit.
Over the past two years, sprouts has reduced its long-term debt by about 50% while increasing its cash on hand by more than 250%. The company has also opened two new distribution centers in colorado and florida in the past 12 months. Sinclair said that with the launch of these two centers, "now 85% of our stores are within 250 miles of our distribution centers".
But the distribution centers will not only help existing operations by shortening delivery times and improving overall product freshness. They also serve as a focal point for expansion into new markets. On the last quarterly earnings conference call, management reiterated its plans to increase the number of branches by 10% starting in 2022.
While the big growth acceleration is slated for next year, in the meantime the company is taking steps to maximize shareholder value. With sprouts' stock currently valued at just seven times trailing twelve-month operating revenue, the board authorized a $300 million share buyback program in march of this year. At the current market capitalization of $2.6 billion, exercising the entire buyback would increase shareholders' entitlement to the profits by more than 11.
Whether through further share buybacks or new stores, sprouts is poised to generate strong returns for its shareholders in the years ahead.
Nelnet is a diversified conglomerate headquartered in lincoln, nebraska. Although the company operates quietly, its management team has demonstrated a remarkable ability to allocate capital. In this context, nelnet's book value (assets minus liabilities) per share has grown more than 17% per year over the past 17 years.
The company began as a student loan servicer, but later moved to originating loans itself. For a long time, this was a lucrative deal because loans made under the program were backed by the U.S. Government, which limited the risk to the lender. In 2009, however, the U.S. Government decided to take this business into its own hands, leaving nelnet with a huge portfolio of outstanding loans that had yet to be repaid.
Today, nelnet continues to harvest cash from that slowly shrinking loan portfolio, and according to its latest quarterly report, the company expects to get another $1.5 billion from it by 2026. With these large cash inflows, management reallocated the money to a number of other investments, most notably the nelnet business services (NBS) segment.
Even though the name is not particularly resonant, it is an excellent business. NBS consists of nine different brands and provides educational software and payment-related services. Overall, NBS has generated $311 million in revenue over the past twelve months – up 29% in the most recent quarter – with a profit margin of more than 30%. Given management's track record, investors should expect this segment to continue to grow through further acquisitions, as management has added two new companies in the last year alone.
But nelnet is putting its capital to work elsewhere as well. Last year, the company opened and launched a new bank in salt lake city, utah, funding it with $100 million in initial funding. In addition, the company has several other private investments, ranging from venture capital initiatives to real estate and solar projects, valued at more than $500 million on nelnet's balance sheet.
Like sprouts farmers market, nelnet currently trades at a price-to-earnings ratio of less than 10 times operating income over the last twelve months, and management continues to buy back its own shares regularly. All in all, nelnet is a durable and versatile company, run by capable management that has a proven track record, and trading at far too low a valuation.
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This article reflects the opinion of the author, which may not be in line with the "official" recommendation position of a the motley fool premium advisory service. Questioning an investment thesis – even our own – helps us all think critically about investments and make decisions that help us become smarter, happier and richer.
Ryan henderson owns shares of nelnet and sprouts farmers markets.
This article was written by ryan henderson in english and published on 17.09.2021 on fool.Com published. It has been translated so that our german readers can participate in the discussion.