2023-11-29 09:38:26 ET
Summary
- Envela Corporation operates in the re-commerce industry, focusing on luxury goods such as jewelry and precious metals.
- The company's revenue fell in the third quarter, but this is attributed to strategic spending and may not be a cause for concern.
- Envela is expanding its online presence and is well-positioned to capitalize on the projected growth of the re-commerce industry.
Envela Corporation (ELA) is the North American leader in re-commerce. An increasingly popular industry, re-commerce is the process of reselling previously-owned products as whole goods, or recycling items' materials for reuse. In this industry, Envela operates in the luxury goods space, and focuses on jewelry and precious metals. They have both physical and online stores, where customers can either buy or trade in eligible goods. Recently, Envela released their third quarter reports, further detailing their financial positioning in the industry. While its revenue fell, this is seemingly due to increased, strategic company spending, and may not be cause for alarm. When asked, CEO John Loftus corroborated this reasoning, attributing the decrease to internal hirings and spending surrounding expansion projects.
Internally, ELA has made hiring additions to strengthen their management team. This commitment to high level employees is encouraging, and further reflects Envela's goal of creating long-term success. Additionally, Envela is expanding outwardly as well. As of September 2023, they've opened 8 store locations, and by 2024, are looking to acquire 4 more. They've also increased spending to bolster their online presence, hoping to further develop this revenue stream. ELA expansion will look to capitalize on the ever-growing re-commerce industry.
Within the last few years, re-commerce has begun to take off, and it's now estimated 80% of Generation Z and 78% of Millennials have purchased pre-owned products in the past 12 months. Additionally, according to those who follow the industry closely, re-commerce is projected to grow 16x more than traditional retail by 2026. If these projections hold true, Envela is in an auspicious position. Already a prominent company in re-commerce, Envela would benefit greatly from an industry boom.
When considering these current stories about ELA, we need to determine which news topics will have a long-term and ongoing effect on the company and its share price. Recently, Envela Corporation released third quarter reports revealing sound financials. They've also made key hiring moves and asset acquisitions to inspire future growth. These moves are made ahead of reports projecting the re-commerce industry to skyrocket. Occupying a prominent role in this industry, Envela will look to capitalize on this boom, maximizing company revenue in the coming years.
While current news stories, good or bad can sway our opinion about investing in a company, it's good to analyze the fundamentals of the company and to see where it's been in the past and in which direction it's heading.
This article will focus on the long-term fundamentals of the company, which tend to give us a better picture of the company as a viable investment. I also analyze the value of the company versus the price and help you to determine if ELA is currently trading at a bargain price. I provide various situations which help estimate the company's future returns. In closing, I will tell you my personal opinion about whether I'm interested in taking a position in this company and why.
Snapshot of the Company
A fast way for me to get an overall understanding of the condition of the business is to use our stock analyzer's company rating score.
ELA currently has a company rating score of 78 out of 100. This is a respectable score.
Before jumping to conclusions, we'll have to look closer into individual categories to see what's going on.
Fundamentals
Let's examine the price per share history first. In the chart below, we can see that price per share has shown significant, consistent growth over the last 5 years. Overall, share price average has grown by about 259.66% over the past 10 years, or a Compound Annual Growth Rate ((CAGR)) of 13.66%. This is an impressive return.
Earnings
Looking closer at earnings history, we see an interesting story. From 2013 through the end of 2015, ELA reported unfavorable, negative earnings. Beginning in 2016, however, their finances shifted dramatically. Earnings not only surged upwards into positive levels, but from the end of 2016 to present day, ELA earnings have continued to soar, consistently growing every year.
When a company experiences such a turnaround in earnings, it begs the questions, what happened? When looking at the timeline of ELA earnings, two immediate reasons come to mind. The first, is simply the accessibility of re-commerce. Expansion across the re-commerce industry to websites and online stores in the last 5 years has risen greatly, giving people the most access they've ever had. Logically, we can conclude increased access to re-commerce plays an important part in the overall profitability of the industry. The other main consideration in the spike of ELA earnings is the general state of the United States' economy. Since the Pandemic, many Americans have less access to disposable income amidst high inflation. This has changed consumer spending habits, and many are turning towards re-commerce options to help combat this disparity. In this way, ELA earnings seem to be linked to the overall rise of re-commerce itself, and this makes sense given the years in question.
Consistent earnings make it easier to accurately estimate the future growth and value of the company. In this regard, it seems ELA is beginning to provide a clear picture to follow moving forward.
Since earnings and price per share don't always give the whole picture, it's good to look at other factors like the gross margins, return on equity, and return on invested capital.
Return on Equity
Return on equity has risen dramatically since 2018. Starting at 8.14%, ELA ROE skyrocketed to 44.38% in 2020. Since then, ROE has remained at consistent levels, experiencing little fluctuation. Currently, ELA ROE is 44.4%. For return on equity ((ROE)), I look for a 5-year average of 16% or more. ELA's ROE surpasses this requirement, boasting a 5-year average of 33.95%.
Let's compare the ROE of this company to its industry. The average ROE measured across 15 general retail companies is 18.29%
Therefore, both ELA's current ROE Average of 44.40%, as well as their 5-year average ROE of 33.95%, are well above industry average.
Return on Invested Capital
ELA's Return on Invested Capital ((ROIC)) has shown consistent, upward movement over the last five years. Since 2018, ELA ROIC has increased each consecutive year, beginning at 9.83% and rising to 27.04%. For return on invested capital ((ROIC)), I also look for a 5-year average of 16% or more. ELA's 19.32% average meets this requirement, and the consistency of their growth is quite impressive.
Gross Margin Percent
Similar to ROIC, ELA's GMP has shown consistent growth over the last five years. Beginning at 17.91% in 2018, GMP has grown every year since, and currently sits at 24.54%. I typically look for companies with gross margin percent consistently above 30%. However, despite ELA's consistent growth, they still fall short of this requirement, recording a five year average of 20.93%.
Financial Stability
Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity is less than 1. This is a positive indicator, telling us that the company owns more than it owes.
ELA's Current Ratio of 5.39 is another positive factor, indicating adequate ability to use assets to pay its short-term debts.
Ideally, we'd want to see a Current Ratio of more than 1, and ELA far exceeds this amount.
According to the balance sheet, the company appears to be in good financial health. In the long term, it has more than enough assets to cover its debts. In the short-term the company is generating enough cash flow, to fulfill its obligations.
ELA does not currently pay a regular dividend.
This analysis wouldn't be complete without considering the value of the company vs. share price.
Value vs. Price
The company's current Price-Earnings Ratio of 9.55 indicates that Envela might be undervalued when comparing its current PE Ratio to a long-term market average PE Ratio of 15.
The Estimated Value of the Stock is $5.20, versus the current stock price of $3.89. This indicates that ELA is currently selling at a bargain price.
Summarizing the Fundamentals
According to the facts, ELA is financially sound in a long-term sense, having enough equity as compared with debt, and in the short-term having a current ratio that indicates it has enough cash to cover current liabilities.
Envela Corporation has strong earnings, which have been recorded at excellent levels over the last 6 years. Additionally, other fundamentals including ROE, ROIC, and Gross Margins, have all shown consistent improvement as well.
Other considerations into ELA include their strategic expansion plans, and their overall industry outlook. With re-commerce stores offering easier consumer availability than ever before, paired with consumer spending habits rebounding from a pandemic, the industry is poised to continue to see success. ELA looks to take advantage of this by hiring an experienced leadership team, growing their product offerings, and expanding both their physical store locations and online presence.
In terms of valuation, my analysis shows that the stock is undervalued.
ELA vs. The S&P 500
Now, let's see how ELA compares versus the US stock market benchmark S&P 500. From 2015 to 2020, the SP 500 has greatly outperformed ELA. But from 2020 to the end of 2023, ELA has surged and outperformed the S&P 500. The recent years' performance is promising, but I'm still a bit cautious because I'm not sure if the recent upward trend will continue.
Forward-Looking Conclusion
Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 27.50% .
In addition, the average one-year price target for this stock is $8.00 which is about a 105.66% increase in a year.
The Expected Annual Compounding Rate of Return is 20.82%.
Does ELA Pass My Checklist?
- Company Rating 70+ out of 100? YES (78.4)
- Share Price Compound Annual Growth Rate > 12%? YES (13.66%)
- Earnings history mostly increasing? YES
- ROE (5-year average 16% or greater)? YES (33.95%)
- ROIC (5-year average 16% or greater)? YES (19.32%)
- Gross Margin % (5-year average > 30%)? NO (20.93%)
- Debt-to-Equity (less than 1)? YES (0.46)
- Current Ratio (greater than 1)? YES (5.39)
- Outperformed S&P 500 during most of the past 10 years? NO
- Do I think this company will continue to successfully sell their same main product/service for the next 10 years? YES
ELA scored 8 /10 or 80%. Therefore, ELA is worth considering as a potential investment opportunity.
Is ELA Currently Selling at a Bargain Price?
- Price Earnings less than 16? YES (13.61)
- Estimated Value greater than Current Stock Price? YES (Estimated Value $5.20 > $3.89 Current Stock Price)
Valuation metrics suggest that ELA is selling at a bargain price as indicated by the Estimated Value. ELA's current Price Earnings Ratio also indicates that the stock could be selling at a bargain price.
Overall, I'm interested in possibly investing in ELA. The fundamentals are promising and it seems to be selling at a bargain price. My main concerns are that it has only recently started to outperform the S&P 500 since about 2020, and I'm not confident if that trend will continue.
Also, before I decide to invest in the company, I will examine Envela's products in more detail.
For further details see:
Envela Corporation And Its Real Value