Buyback Wednesdays – Chegg Wants To Buy Back Nearly 40% Of Its Stock

With earnings season winding down, the stock buyback announcements we are seeing now are often from retailers that tend to end their fiscal year in January. A total of 26 companies announced buybacks during the last week. Capri Holdings (CPRI), the holding company for brands like Versace, Jimmy Choo and Michael Kors, announced a $1 billion buyback last week representing 13.5% of its market cap at announcement.

When I tweeted the following last November, little did I expect that my wish would be granted just a few days later when Tapestry (TPR) announced a $1 billion buyback and then once again announced an additional $1.5 billion buyback in May 2022 as we discussed here last month.

Another specialty retailer announcing a very large buyback was the company formerly known as Restoration Hardware (RH), which outdid both Capri and Tapestry by announcing a $2 billion buyback representing nearly 27% of its market cap at announcement. RH trades at a forward P/E of 12 and a forward EV/EBITDA under 9. Net income margin of nearly 20% is impressive but the company is a beneficiary of a big pandemic related jump in revenue. Net income margin pre-pandemic was in the high single digits.

The industrial company WESCO International (WCC) also announced a $1 billion buyback representing nearly 15% of its market cap at announcement last week but did not make our top 5 list. The company that topped our list was one that started out as a textbook rental company and then branched out into homework and exam prep. Chegg (CHGG) has had a difficult year with the stock down more than 72% after revenue growth slowed down significantly during the last two quarters. The company has also taken a reputation hit in recent years as educators have blamed the company for enabling cheating by students and Pearson (PSO) sued the company for selling answers from Pearson textbooks.

After years of net losses, the company finally turned the corner and reported positive earnings during the trailing twelve months (TTM). Free cash flow during that period was $165 million. With an enterprise value of $3.14 billion, we get an EV/FCF of 19, not exactly cheap to trigger a buyback that is almost 40% of the market cap of the company. While the company has $1.2 billion of cash and short-term investments on the balance sheet to fund the buyback, it also has $1.7 billion of long-term debt. The stock appreciated 9% after this buyback announcement but it might be better to wait and see if the company can revive growth and address the reputation concerns before considering a position in Chegg. With only 5% of the float short and a short ratio (days to cover) of 1.7, the company’s buybacks are unlikely to trigger short-term appreciation through a short squeeze.

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