Making The Case For Taking Big Lots Private

Shares of Big Lots, Inc. BIG have lost 4 percent since in 2017 and are trading at a discount versus its peers, Loop Capital Markets' Anthony Chukumba commented in a report. As such, it may be a good idea for the company to go private since it's suffering from a "lack of respect" from the public market.

Big Lots could be considered as the "Rodney Dangerfield of deep discount retailing," Chukumba argued. The stock has been underperforming at a time when it boasts impressive comparable store sales gains, margin expansion and a track record of exceeding Wall Street's estimates in earnings reports.

Yet the stock is trading at 10.4x the analyst's fiscal 2018 earnings per share estimate, which is a "substantial" discount to its most comparable peers, including Dollar General Corp. DG and Dollar Tree, Inc. DLTR. Big Lots could reasonably sell itself for as much as $64 per share, which is based on a 13.8x multiple on 2018 earnings which is still a discount to its peers.

Private equity and strategic buyers with expertise in the discount retailing industry would find an acquisition attractive given the company's strong performance, the analyst said. Specifically, at $60 per share, a buyer could generate an internal rate of return (IRR) of 23 percent, which is "comfortably" above the 20 percent returns that private equity firms typically target.

"While we have no reason to believe a deal is imminent, we think the probability of a transaction could rise if Big Lots continues to "get no respect" from public equity investors," Chukumba concluded.

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The Street Is Missing The Big Picture On Big Lots, Analyst Upgrades

Image Credit: Dwight Burdette [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)], via Wikimedia Commons