Is Investing in the Consumer Retail Sector a Lucrative Idea?

Equities are extremely risky right now, and many investors just have no clue what to do during these uncertain times. Even when some stocks have been underperforming the entire year, some analysts believe that the underlying businesses are still lucrative.

DemandTec DMAN is a small-cap company that specializes in producing software for retailers to optimize pricing decisions. It has dropped over 37% since January. Despite its struggling equity, the company has continued support from Wall Street Analysts.

To learn more about DemandTec's operations, Benzinga reached out to Jeff Houston of Barrington Research.

According to Houston, DemandTec has an attractive valuation. “Currently, DemandTec trades at two times Enterprise Value/Revenue, while comparable companies trade at five times revenue.” EV/revenue is a financial metric that measures the enterprise value, which is the holistic value of the firm to both debt and equity holders, compared to revenues brought in. The low multiple may mean that DemandTec has room to grow, going into the future.

Houston agrees with the growth prospects, based on EV/revenue, but mentioned “DemandTec should trade at a discount for a few reasons. First, the retail sector is facing headwinds, and it is hard for companies to sell $1-2 million deals when the CEO wants marketing executives to cut costs. Secondly, middle market retailers are facing even more difficulties simply as a function of their small size; competition is increasingly fierce between small and large companies.”

Despite the inherent difficulties faced by the consumer retail sector, Houston contends that DemandTec should trade higher than it has been. For starters, “the company is open to being acquired by a large company. This will be easier to increase its product's exposure, which can definitely cut costs for the acquirer. It may also be possible to sell its products to new retailers because it has well-known clients, including Wal-Mart WMT, Proctor & Gamble PG, and Kraft KFT.”

While DemandTec is suffering from volatile market conditions, it has been able to increase its network by connecting retailers with manufacturers. Expenses may be mitigated as a result of rapid expansion. However, do the raw numbers permit equity growth going into the next couple quarters?

Not including price/earnings (because it operated at a net loss during the last five quarters), DemandTec may be overvalued compared to its direct competitors. Its price/book value is 4 versus a 3.6 average, its price/sales is 2.4 versus a 3.3 average, and its price/cash flow is 23.1 versus a 13.7 average.

Considering growth and quality factors, DemandTec has positive revenue growth at 10.4% over the last three years while competitors grew at 5.9%. However, operating and net margins were both negative for the year, while competitors were positive. Lastly, DemandTec's return on equity was -30% for the last twelve months while comparable companies returned 12.9% on average.

DemandTec is operating in a struggling industry, as many consumers are attempting to curb their spending habits. While DemandTec may appear to be a worthwhile investment during a booming economy, investors will have to determine if it is appropriate to do so when capital markets are struggling to gain traction.

DemandTec is currently trading at $6.78.