The market started the year off strong, pushing to a new all-time high before dropping sharply back in the last week. The enthusiasm associated with the completion of Phase One of the U.S.-China trade deal seems to have been offset by concerns about the ramifications of the coronavirus in China. While most economists are predicting the effect should be short-term, it will nonetheless be significant; consider that the entire the virus has been identified as springing from (population about $600 million) has been quarantined and travel into China is already being limited by some airlines, with countries like the U.S. considering larger-scale limitations.
The picture I just painted sounds grim, but if in fact we are talking about a short-term event that will ultimately be overcome, that means that any drawdown effect the market sees relative to should also be short-lived, which increases the likelihood this could simply create a new opportunity to “buy the dip” on a selective basis. I think some of the best opportunities may come from stocks that roughly match the market pattern.
PVH Corp (PVH) is a good example. The stock is a little more than $20 above its 52-week low at around $67, but has dropped by about -16% since the beginning of the year. Against the backdrop of a long-term downward trend that dates back to June, 2018, it looks like it could actually be a favorable short-term pullback against a potential long-term trend reversal. Backed up by solid fundamentals, the stock’s value proposition PVH a big near-term winner.
Fundamental and Value Profile
PVH Corp. is an apparel company. The Company operates through three segments: Calvin Klein, which consists of the Calvin Klein North America and Calvin Klein International segments; Tommy Hilfiger, which consists of the Tommy Hilfiger North America and Tommy Hilfiger International segments, and Heritage Brands, which consists of the Heritage Brands Wholesale and Heritage Brands Retail segments. The Company’s brand portfolio consists of various brand names, including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner’s, Olga and Eagle, which are owned, and Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection and Chaps, which are licensed, as well as various other licensed and private label brands. The Company designs and markets dress shirts, neckwear, sportswear, jeanswear, intimate apparel, swim products and handbags, footwear and other related products. PVH has a current market cap of $6.6 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased about -3.4%, while sales were mostly flat, but positive by 2.5%. In the last quarter, earnings improved by nearly 48%, while revenues increased almost 9.5%. The company’s margin profile also is a sign of strength; over the last twelve months, Net Income was 6.57% of Revenues and improved to 8.08% in the last quarter.
Free Cash Flow: PVH’s Free Cash Flow is healthy, at $696 million. This is a number that has improved from a little more than $372 million in the final quarter of 2018, and that translates to a Free Cash Flow Yield of 10.4%.
Debt to Equity: PVH has a debt/equity ratio of .71, which is a pretty conservative number. Their balance sheet shows $433.5 million in cash and liquid assets against $4.27 billion of long-term debt. Both of these numbers have increased – cash from a little more than $400 million at the end of 2018, and debt more alarmingly from $2.9 billion since the end of the first quarter of 2019. Their solid, improving margin profile, combined with their healthy cash flow means that servicing their debt isn’t a problem.
Dividend: PVH pays an annual dividend of $.15 per share, which translates to a minimal dividend yield of just .15%. The stock’s dividend is not a defining reason to own the stock, but it is noteworthy that the stock pays a dividend in an industry where most companies do not.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for PVH is $80.72 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.11. Their historical average is 1.47, which means the stock is undervalued by about 32%, and provides a good reference for the stock’s long-term potential upside, which is at about $119 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart displays the last two years of stock performance for PVH. From its all-time high at nearly $170 in June of 2018 to its low around $67 in late August, the stock dropped more than $100 per share. From that point, however, the stock picked up strongly bullish momentum, driving to a high around $106 at the 38.2% Fibonacci retracement line at the beginning of January before dropping back sharply to this point. The stock’s nearest support level is around $83, with immediate resistance at around $91. A break above resistance could give the stock momentum to rally to about $98 before hitting new resistance, but given its current bearish momentum, it is more likely to drop to about $83 before testing new support.
Near-term Keys: Given the direction, and pace of the stock’s drop over the last few weeks, the highest-probability opportunity for a short-term trade is on the bearish side, either by shorting the stock or buying put options. However, if the stock can rally higher, and break above $91 per share, the stock could offer an interesting buying opportunity, either with the stock itself of with call options. The stock’s long, extended downward trend has pushed the stock to levels that, along with the company’s strong fundamental profile, offers a very interesting value proposition that could make it a big winner in the long-term.