Written by Daniel Da Costa at The Motley Fool Canada
Over the last year and a half, investors have had their pick of the litter when it comes to stocks temporarily trading undervalued. However, while many stocks have been impacted and now trade cheaply as a result, there may not be a higher quality stock trading at a bigger discount than Aritzia (TSX:ATZ).
Although Aritzia has been growing rapidly for years now and continues to have years of growth potential ahead of it, and although it weathered the storm well through the pandemic, the stock is now facing new headwinds as both higher inflation rates and higher interest rates impact consumers’ budgets.
According to Statistics Canada, household credit market debt as a proportion of household disposable income rose to 184.5% in the first quarter of 2023, up from 181.7% in the fourth quarter of 2022. For comparison, heading into the 2008 financial crisis, household debt to income in Canada was closer to 150%.
So, with consumers now more in debt than ever, and with the cost of servicing that debt rising, as well as the cost of all goods, especially essential goods, also rising, many consumers will have much less to spend on discretionary items, which is precisely what Aritzia sells.
So, there’s no question that Aritzia is being impacted in the current economic environment. Whether these impacts are significant enough to cause the stock to fall more than 50% from its all-time high and down more than 45% over the last 12 months is a different story, though.
So, with Aritzia being impacted only temporarily while its stock trades unbelievably cheap, is the worst over for the growth stock? And is now a good time to gain exposure?
Has Aritzia stock reached its bottom?
There was a tonne of anticipation from investors and analysts that Aritzia might see an impact on operations due to the worsening economic environment. However, that wasn’t confirmed until its most recent earnings report back in mid-July.
Aritzia released its first-quarter earnings for its fiscal 2024 year, and while the results were in line or slightly ahead of expectations, the growth stock also lowered its guidance for both fiscal 2024 and fiscal 2025, leading to a significant selloff in the stock.
Aritzia’s normalized earnings per share (EPS) in the first quarter came in at $0.10, ahead of the consensus expectations of $0.08. For the full year, though, the consensus for revenue was lowered by roughly 6.5% at the midpoint of its guidance range. More importantly, the midpoint of its guidance range for EPS fell from $1.43 to just $0.92.
$0.92 would be a 50% reduction in normalized EPS from fiscal 2023, but analysts already expect that Aritzia’s EPS can recover in fiscal 2025 by more than 100% to a new all-time high of $1.88.
Therefore, not only could this be the lowest that Aritzia trades at, around $25 a share, but this opportunity may not last forever.
How cheap is the impressive growth stock?
Right now, Aritzia stock trades at a forward price-to-earnings (P/E) ratio of just 23.4 times, below its three and five-year averages of 30.1 times and 36.4 times, respectively. Furthermore, it’s trading at just 13.5 times its expected earnings in fiscal 2025.
So, although there is some risk in buying Aritzia today, and it may take longer than analysts expect to recover, there’s no denying that the stock is trading ultra-cheap while it faces these macroeconomic headwinds.
Therefore, if you believe in Aritzia stock’s potential and plan to buy and hold the stock for the long haul, now is an excellent opportunity to do so.
If Aritzia’s EPS were to recover to $1.88 as analysts expect in fiscal 2025, and its P/E ratio recovers back to even just its three-year average of 30.1 times, the stock would be worth more than $56.50, a more than 120% premium to where it trades today.
Therefore, while you can buy it at such a significant discount, Aritzia stock is one of the best investments to make today.
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Fool contributor Daniel Da Costa has positions in Aritzia. The Motley Fool has positions in and recommends Aritzia. The Motley Fool has a disclosure policy.