When a multi-billionaire adds a company that few know well to their portfolio, it’s worth taking a closer look to see what they have stumbled upon, or what everyone else has missed.
Dan Loeb snapped up Global Blue Corporation Holdings stock for his fund Third Point and, after taking a deeper dive, it’s clear to see why.
So, should you follow in Dan’s footsteps and consider a position too in this tax-free shopping play?
What Most Investors Missed
Global Blue is, at heart, a shopping tax refund firm based out of Switzerland. It is also involved with currency conversion, point-of-sale technology, and marketing services but its digital platforms and analytics related to tax-free shopping is where it shines brightest. That’s how the firm has gained a reputation for increasing customer satisfaction and loyalty, which in turn have produced a competitive edge.
The company has a dominant market share in the tax-free shopping sector, processing 35 million transactions annually across 300,000 points of sale, and that has translated to a predictable revenue stream, a key fact that likely attracted the Third Point investment team.
One of the key tenets to the firm’s success has been partnerships with luxury retailers and established brands that result in higher transaction values. So too are its target buyers typically affluent international travelers with higher spending power than the average person, and who buy higher ticket items.
To better serve these customers and partners, Global Blue has strategically focused on high-tourism areas that can drive growth as well as emerging markets that offer untapped opportunities for tax-free shopping services.
Having already sown up such a large share of the tax-free shopping market, Global Blue is expanding to payment processing and other financial technology services as a way of broadening its revenue base. Most likely, Dan Loeb and his investment team have spotted how that strategy will mitigate revenue risks over time of being solely dependent on tax-free shopping sales.
All That Glitters Is Not Gold
While there is lots to like about Global Blue, the business model is challenging, not least because the company must navigate the various regulatory hurdles of each country.
The nature of its international business also means it is exposed to currency exchange risks that can materially impact earnings, forcing currency hedging strategies to play a key role in financial successes.
And then there’s the rise of e-commerce that offers consumers an alternative to the traditional shopping behavior in brick-and-mortar locations that is essential to Global Blue’s success.
Clearly, the company is adapting to the online environment and has made a concerted effort to better understand consumer preferences by investing in data analytics and by improving service offerings to support partner retailers and brands.
So what does it all boil down to, is Global Blue stock a buy? And what is it that attracted Dan Loeb to invest?
Why Did Dan Loeb Buy Global Blue Stock?
Most likely, Dan Loeb bought Global Blue stock because it is 51.9% undervalued according to the consensus estimate of analysts.
The price target set on the stock is $6.96 per share, and a cash flows analysis vindicates that with fair value sitting at $6.42 per share.
It’s clear to see why the upside is so much higher than where the share price is trading when examining the income statement because earnings per share have improved from -$2.68 per share in FY 2021 to -$0.55 in FY 2022 and -$0.13 this fiscal year.
So too have revenues exploded over that time from $52.4 million in 2021 to $139.3 million in 2022 and $337.9 million this year.
Accompanying the impressive sales growth is higher gross margins that have increased from -11.3% in ’21 to 40.4% last year and 67.2% this year.
No matter what line item you look at the improvements are evident. For example, operating income turned around in a big way from -$521 million in 2021 to -$98 million last year and +$8.1 million this year.
Clearly, management deserves plaudits for turning around the top and bottom lines. Yet if you look at GB share price this year it’s declined by 2% and by 34% over the past 5 years.
Certainly, the disruptions to travel in 2020 and 2021 impacted Global Blue’s revenues materially, as well as its profitability but it doesn’t appear as if the share price has reflected the improving fundamentals, and likely that disconnect is what has enticed Third Point to take a position.
Final Thoughts
If there were a couple of drawbacks to buying Global Blue, two that top the list are high debt and price-to-earnings ratio.
Long-term debt stands at $788 million while cash is $260 million. It’s not an insurmountable level of debt by any means but for a company generating $337 million in sales annually it is on the high side.
The larger problem may well be the price-to-earnings ratio of 109.9x that signals earnings are still far too low relative to the market capitalization, and that’s where management needs to focus on boosting profitability.
As revenues rise, it’s clear that gross margins and profitability have the potential to return to levels not seen since 2019. All in all, management has done a remarkable job in improving revenues and net income over the past three fiscal years.
The signs point to further improvements, and if so, it’s clear that Dan Loeb may be on to a winner because the share price has yet to reflect the better fundamentals in any meaningful way.
For now, the upside is 51% to fair value, and time will tell if the market actually rewards shareholders to that same amount.
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