CSS Industries Shares Appear Undervalued, DA Davidson Says In Upgrade

CSS Industries Inc (NYSE: CSS) reported Thursday with better-than-expected sales, EBITDA and free cash flow for the fiscal fourth quarter, prompting an analyst at DA Davidson to conclude the stock has bottomed out. 

The Analyst

Analyst Linda Bolton Weiser upgraded shares of CSS Industries from Neutral to Buy and lowered the price target from $24 to $19, as she reduced her target EV-to-EBITDA multiple from 6.5 times to 5.5 times.

The analyst had downgraded the shares following the Q3 print in February.

The Thesis

CSS Industries’ free cash flow is expected to remain strong in fiscal 2019 at $20 million or $2.18 per share, rendering the FCF yield at a very attractive 13.5 percent, Bolton Weiser said in a Monday note.

Shares of the novelty and greeting card maker are undervalued and could move higher, the analyst said. 

Bolton Weiser projects upside to her 5.5 times target multiple in the event that CSS Industries makes an acquisition that could improve its organic sales growth profile.

In Q4, organic sales exceeded expectations; the metric has improved in four consecutive quarters. Although the company looks for flat organic sales performance, Bolton Weiser said the secular shrinkage of retail inventory led it to guide to a 2-3 percent organic sales decline for fiscal 2019. 

D.A. Davidson lowered its sales and EBITDA estimates.

” … But with the stock’s additional 23-percent decline since it gapped down on the Q3 report, we think the valuation at 4.5x FY20E EBITDA is too low given that fundamentals have not deteriorated further.” 

The Price Action

CSS Industries stock has lost about 35 percent in the year-to-date period.

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