Toy Story: Too Cheap to Ignore

Investors have long shunned shares of Toys `R' Us (TOY ), and for good reason: They don't see further growth ahead. Its stock has swooned, from 28 a year ago to 17 on June 19. But to Scott Kuensell, managing director of Brandywine Asset Management, Toys is now too cheap to ignore. Its stock is trading at 13.6 times his 2002 estimate of $1.25 a share--and selling at book value. That makes it way undervalued, based on its real estate assets alone, says Kuensell, who has been buying shares. Toys owns 540 stores--mostly acquired in the 1980s at depressed prices. And it has a strong balance sheet with debt at 34% of capital.

In 2001, Toys started streamlining its stores to get away from the warehouse look. They're brighter, with wider aisles that make it easier to find items. Melissa Comer Williams of Gerard Klauer Mattison has raised estimates for the year ending Jan. 31, 2003, to $1.15 from $1.10, and expects $1.35 in 2004. Williams, who doesn't own the stock, rates Toys a buy. Her 12-month price target: 25. (Gerard Klauer performed banking services for Toys in the past three years.)

By Gene G. Marcial

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