Most long-term investors put a heavy emphasis on fundamental analysis to help guide their decisions about what stocks they should pay attention to. In that vein, one of the big questions that most investors like to try to answer is what kind of returns they can realistically expect over time. That might sound funny since stock prices are so fluid and vary from one extreme to another over time; but one of the things that has proven to be a pretty good point of reference is how actively management works to return value to its shareholders. There are two primary methods that get used: stock buybacks and dividends.
Stock buybacks tend play a big role in what analysts seem to consider as part of a stock’s fundamental strength. Stock buybacks are interesting because companies use a portion of their available cash to reduce the number of available shares in the marketplace. Over time, that reduction generally means that the stock price should go up, which means that compared to other things management could choose to do with its cash, buying its own stock is deemed to provide a stronger rate of return.
Dividends are something that I think are a stronger indication of fundamental strength – in particular when you talk about how consistent the dividend has been over time. Income-oriented investors like to gravitate to stocks offering very high dividends as an alternative to bonds and other interest-bearing instruments. Sometimes, however a high dividend really isn’t a good indicator that a company has great fundamental strength; the sustainability of that dividend is a better question to ask.
2020 put this mindset to the test, as the pandemic forced a lot of companies to suspend or eliminate their dividend payouts. Some companies have reinstated those payouts, which provides a useful method to begin filtering between companies that have merely survived and those that may be in position to recover more quickly. Guess? Inc. (GES) is a stock that suspended its dividend payout at the beginning of the pandemic, but then reinstated it at the end of 2020. That is a sign of confidence by management that I don’t think stock buybacks reflect in the same way. Based on some of the fundamental elements that I like to use, the company also some interesting strengths working in its favor. Does the stock also offer a useful value proposition?
Fundamental and Value Profile
Guess?, Inc. designs, markets, distributes and licenses a lifestyle collections of apparel and accessories for men, women and children. The Company operates through five segments: Americas Retail, Europe, Asia, Americas Wholesale and Licensing. The Americas Retail segment includes the Company’s retail and e-commerce operations in North and Central America and its retail operations in South America. The Europe segment includes the Company’s retail, e-commerce and wholesale operations in Europe and the Middle East. The Asia segment includes the Company’s retail, e-commerce and wholesale operations in Asia. The Asia segment includes the Company’s retail, e-commerce and wholesale operations in Asia. The Licensing segment includes the around the world licensing operations of the Company. Its apparel is marketed under various names, including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, MARCIANO, Question Mark and Triangle Design, GUESS Kids, Baby GUESS, YES, G by GUESS and GUESS by MARCIANO. GES’s current market cap is $1.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined by about -3.3%, while revenues dropped -23%. The pattern reversed drastically in the last quarter, as earnings rose nearly 103.5%, while sales increase about 14%. Over the past twelve months, the company’s margin profile was negative, with Net Income -4.33% of Revenues for the last twelve months, but improved in the last quarter to 10.86%.
Free Cash Flow: GES’s free cash flow is healthy, at almost $193 million. That translates to an useful Free Cash Flow Yield of nearly 11%.
Debt to Equity: GES’s debt/equity ratio is .58, which is very low. The company doesn’t have a lot of debt, which means that they don’t have to worry about servicing a lot of debt. Cash and liquid assets was a little more than $469 million in the last quarter, marking a modest increase from $419 million a year ago.
Dividend: GES pays an annual dividend of $.45 per share, which translates to a dividend yield of 1.61% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to work with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term, fair value target around $16 per share, which means that GES is very overvalued, with about -42% downside from its current price and a useful bargain rate at around $12.75.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the stock’s price performance over the past year. The diagonal red line traces the stock’s upward trend from a low at around $6.30 in late May to a high at around $28.50 last month. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After retracing back to a low close to the end of the month at around $21.60 before finding support and rallying near to that peak up to the end of last week. The stock is a little below that peak, which marks immediate resistance, with current support at around $25 per share. A break above $28.50 should have immediate upside to about $31.50, while a drop below $25 has downside to its last pivot low at around $21.50.
Near-term Keys: If the stock can break above resistance at $28.50, there could be an interesting short-term bullish trade to be had using call options or the stock by itself, with a near-term target at around $31.50. The strongest bearish signal would come from a drop below $25, with a bearish trade target at around $21.50 per share. There is really no basis, however for a long-term, value-oriented position at the stock’s current price.