HSP, CLR – Buy when others are fearful

Healthy lifestyle.jpg

At first glance Clover (CLR) a producer and distributor of milk products and Holdsport (HSP) a sport and outdoor equipment retailer may have nothing in common.

However, on closer inspection, we find the following similarities:

  1. Exposed to the Consumer

HSP owns the Sportsman’s Warehouse and Outdoor Warehouse retail stores as well as the Capestorm clothing and equipment brand. As Southern Africa’s population gets richer, I am convinced they will increasingly use the fantastic weather and facilities available in their countries to engage in outdoor activities. The world is on a health, fitness and nature trend and will continue in this direction.

CLR produces milk products such as cheese and yoghurt. Importantly it has a huge network of trucks and distribution centres which ensure that the “cold chain” of uninterrupted refrigeration is maintained. They are looking to make acquisitions, such as the purchase of the excellent Frankie’s soft drinks, that can leverage off this existing infrastructure. Again the consumer, as he becomes more effluent, will naturally buy more dairy and chilled products.

  1. It is tough out there

Both companies recently published negative trading statements. CLR sees profits down over the festive period due to poor weather, higher input costs that could not be passed on to consumers and general lack in consumer demand. They expect half year earnings to be down by about 20%. HSP has provided a four months update that sees revenue up 5%, which at reported price inflation of 8.5% means that sales were down 3.5% in real terms. They do not provide any commentary, but given recent updates from the likes of Mr Price, we know that consumers are constrained by rising costs, stagnating wages and a general lack of income in the economy.

  1. The companies are relatively cheaply valued

Given these poor trading updates and the general market conditions, it is not a surprise that both companies are trading relatively cheaply. By my calculations, HSP is heading towards full year earnings of about 4.50, putting it on a forward PE of 13 and the dividend yield of 5.5% is likely to be sustained. Similarly, CLR is looking at a conservative FPE of about 11, with a healthy dividend yield of almost 4% also sustainable.

  1. Toes are being dipped into Southern Africa

Both companies are exploring expansion into Southern Africa. Holdsport has opened stores in Namibia and will likely look next into Botswana, Mozambique and Zambia. Clover has an established Southern African footprint. The lessons they learn from operating in other jurisdictions, will serve these companies well, when the other African markets inevitably mature sufficiently to support their businesses.

  1. Both companies are set to benefit from the long term demographic and socio-economic trend

Most importantly, both these businesses have good fundamentals. We should regard current consumer pressure as temporary and a buying opportunity. In the long term, growing demographics, will mean more consumers. And also more effluence amongst these consumers. They will consume more footballs, squash rackets, hiking boots, lemonade, yoghurt and all these other things that are required for a daily balanced and healthy life.

Warren Buffet is famously quotes as saying that we should “be fearful when others are greedy and be greedy when others are fearful.” In this context, it is an opportune time to use the temporary negativity surrounding these consumer orientated businesses to investment in cashflows that are underpinned by strong long term fundamentals and good valuations.

1 thought on “HSP, CLR – Buy when others are fearful

  1. Pingback: Overview of Posts | Business Musings

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