?? 3 Undervalued Stocks to Watch for FY25??

With FY24 behind us, we’ve identified 3 undervalued stocks we are watching for FY25. But beware—these stocks trade at a discount for a reason and require specific catalysts to unlock their value.

In this free preview, we dive into Leslie’s ($LESL):

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Leslie's is the?largest direct-to-consumer pool and spa care?brand in the United States. It operates over 1,000 physical locations and e-commerce platforms, selling a wide array of supplies and services including chemicals, equipment, parts, and cleaning accessories. Leslie's serves both residential and professional clients, with a significant portion of sales coming from DIY customers.

The company has a?vast store network?located within 20 miles of 80% of US pools; a?strong loyalty program?with 8 out of 10 DIY customers as members; and?exclusive brands and custom-formulated products, accounting for over 55% of total sales.

From FY18 to FY24, the company achieved a revenue Compound Annual Growth Rate (CAGR) of 6.9% while its operating income declined from $116 million (13% operating margin) to $67 million (operating margin of 5%). Leslie’s has debt and lease liabilities of $1.05 billion compared to cash and short-term investments of $109 million.

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Leslie’s trades at an?EV/EBITDA (NTM) of 10.7x?(4 Year average of 14.8x) and at an?EV/Sales (NTM) of 1.0x?(4 Year average of 2.5x).

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Leslie's stock has collapsed by 90% since its IPO in 2020, primarily due to a confluence of post-pandemic challenges. The company benefited from a pandemic-fueled boom in pool installations and increased spending, but this was followed by a?normalization of demand,?higher interest rates, and a?reduction in consumer spending on large-ticket items. Additionally,?supply chain issues and a chlorine shortage led to price increases, which subsequently reversed, negatively impacting sales and profitability.

Inventory build-up and misjudged chemical pricing by the former management team further exacerbated the issues. Consequently, Leslie's gross margin fell from a peak of 41% in FY21 to 35.8% in FY24 and total revenue in FY24 decreased by 15% from its peak in FY22.

Furthermore, high debt of $777 million compared to cash and short-term investments of $109 million creates a challenging financial position.

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Despite the recent challenges, several catalysts suggest a potential for stock appreciation. First,?comparable sales have shown improvement?in Q3 and Q4 of FY24 and management has guided for further improvement in Q1 FY25. Second, the?professional (PRO) consumer group?is demonstrating resilience, with increasing sales, and the company is converting more stores to the PRO format to capitalize on this trend. Third,?chlorine prices have stabilized, and?inventory has been reduced, helping to normalize the impact of prior pricing actions and reduce storage costs. Finally, new management with extensive experience is in place, focused on operational improvements and cost reduction. This is just the first company. The remaining two stocks, with compelling upside potential, are available exclusively to premium members.

?? Read the full report here: Top 3 Stocks to Watch in 2025: Key Picks for Value Investors

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