3 reasons why the Kogan (ASX:KGN) share price could be a buy

The Kogan share price might be interesting to think about it.

| More on:
A happy woman sits on an outdoor deck with trees behind her and holds a credit card in one hand and her mobile phone in the other hand

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Kogan Ltd (ASX: KGN) share price could be an interesting one to think about at the current levels.

What is Kogan?

Kogan is a portfolio of retail and services that includes a large variety of businesses. Here are some of them: Kogan Retail, Kogan Marketplace, Kogan Mobile, Kogan Internet, Kogan Insurance, Kogan Travel, Kogan Money, Kogan Cars, Kogan Energy, Dick Smith, Matt Blatt and Mighty Ape.

It aims to offer those products and services to customers at a low cost thanks to digital efficiencies.

The company says it's focused on making in-demand products and services more affordable and accessible.

Why the Kogan share price could be attractive

1: Cheaper Kogan share price valuation

Over the last six months, the Kogan share price has dropped by around 44%. In just the last three months it has declined by 17%.

That means that the business is not only cheaper, but it could be better long-term value.

In the last few months, Kogan has told investors about demurrage issues, but that has been resolved and does not expect any material demurrage issue to arise in the future.

Management said a key challenge during COVID-19 so far has been managing inventory levels to support its growth and then having too much after building up its inventory levels. That led to higher warehousing costs, and it has also led to increasing promotional activity, which meant a lower near-term gross profit margin and higher near-term marketing costs.

Management expect the business to return to normal levels (relative to the size of the business) and marketing spend as the inventory is reduced.

According to Commsec, the Kogan share price is valued at 23x FY23's estimated earnings.

It's also expected to pay a fully franked dividend of $0.34 per share in FY23. That translates to a grossed-up dividend yield of 4.3%.

2: Operating leverage

Prior to having those inventory issues, Kogan had been demonstrating operating leverage through the business.

In its FY21 half-year result, it reported that gross sales grew 97.4%, gross profit rose 126.2%, earnings before interest, tax, depreciation and amortisation (EBITDA) went up 132.4% and net profit after tax (NPAT) grew 164.2%.

Indeed, in the prior two first half periods, it had seen an increased in its gross profit margin, the contribution margin and the EBITDA margin.

Kogan had been experiencing scale of efficiencies, allowing profit to grow faster than sales. It has been investing in a number of areas for long-term growth. That includes improvements to its logistics network, speed of delivery, range expansion, and improved competition on the platform to improve the experience for customers.

It has pointed out that it's experiencing repeat business from new customers. Kogan said more customers is expected to have ongoing long-term benefits as active customers continue repurchasing.

3: Increasing earnings diversification

The company has been looking to diversify its earnings away from the core Kogan 'exclusive brands' and 'third party brands' offerings. Kogan Marketplace is seeing rapid growth, although this is from a small base. In the third quarter of FY21, Kogan Marketplace saw sales jump 104% year on year to $5.1 million.

In that same third quarter, Kogan Mobile saw growth of revenue of 23.8% to $3.5 million.

One of the biggest things that Kogan has done is buy Mighty Ape, which is a New Zealand business which Kogan said was the number one retail specialist.

Kogan said that Mighty Ape has fast-growing exclusive brands, which are driving margins higher. It also operates its own purpose built distribution centre, allowing room for future growth.

Mighty Ape is already generating a sizeable part of the overall profit. In the third quarter of FY21, Mighty Ape made $6.1 million of the total $44 million gross profit generated across the business.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Growth Shares

a happy investor with a wide smile points to a graph that shows an upward trending share price
Growth Shares

Here are the top five ASX 200 shares in Macquarie's model growth portfolio

These ASX 200 shares are highly rated by analysts at Macquarie.

Read more »

a man with a wide, eager smile on his face holds up three fingers.
Growth Shares

3 ASX shares to buy in 2024 and hold for the next 10 years

Analysts think these top shares are in the buy zone right now.

Read more »

A man leans forward over his phone in his hands with a satisfied smirk on his face although he has just learned something pleasing or received some satisfying news.
Growth Shares

4 ASX growth shares I think will benefit from interest rate cuts in 2024

Not only will home loan holders rejoice, investors of these stocks could also be yelling with joy when the Reserve…

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
Growth Shares

3 of the best ASX growth shares to buy now

Analysts see plenty of upside for these buy-rated shares.

Read more »

A man and woman in an office look at a laptop and discuss investing, budget strategies or other financial concepts
Growth Shares

Here's why analysts love these buy-rated ASX 200 growth shares

There's a reason analysts are feeling bullish about these companies.

Read more »

A woman with strawberry blonde hair has a huge smile on her face and fist pumps the air having seen good news on her phone.
Growth Shares

Big returns could be coming for high-flying Lovisa shares

Morgans doesn't believe it is too late to snap up this hot stock.

Read more »

Smiling young parents with their daughter dream of success.
Growth Shares

Why these ASX 200 growth shares could be top buys now

Analysts are feeling bullish about these growth stocks. Let’s see what they’re saying.

Read more »

Concept image of a man in a suit with his chest on fire.
Growth Shares

Ignore the noise and buy this hot ASX growth stock

A recent pullback may have created a buying opportunity according to Bell Potter.

Read more »