Recessionary economic conditions tend to challenge a lot of different segments of the market. Some sectors of the economy are commonly seen as smart, defensive places to put your money to work in when the health of the broad economy is uncertain. Consumer Staples stocks in the Food Products industry, Healthcare stocks of all types – these are terrific examples of the fact that no matter what the current market conditions or level of investor certainty might be, there are always good opportunities to be had in the market to keep making functional investments. I’ve spent a lot of time in this space focusing on some of those kinds of stocks throughout the course of the past year and a half.
I also find it interesting that even when conditions are uncertain, there are companies that find new ways to succeed. Sometimes that is planned, and sometimes it happens to be the opportunistic happenstance of being in just the right place at the right time. Some of the most obvious examples of what I mean since early 2020 have come from the Tech sector, with companies that offer a variety of cloud-based, remote collaboration and networking tools and solutions that proved to be the perfect way to keep much of corporate America running amid broad-based economic shutdowns and social restrictions.
Another unexpected element of opportunity that has emerged from the difficult conditions mandated by the pandemic actually has come from the Consumer Discretionary sector – an area of the market that usually suffers when basic economic indicators, like unemployment demonstrate clear weakness in the broad economy. Last year, stay-at-home orders that included shuttering or limiting access to gyms, and changed work life for white-collar workers to long-term remote arrangements prompted an increase in demand for outdoor, active, and athletic apparel. The trend was apparently driven by remote workers who realized they could dress as comfortably as they wished to work from home while also finding creative ways to stay fit and healthy even though they might not have access to a local gym. This year, increasing vaccinations, continued positive progress in the unemployment trend and reopening local business and social activity have offered reasons to start looking beyond the pandemic and begin talking about recovery as well as the much-anticipated “return to normal” work and social activities. I think that bodes well for stocks in the Consumer Discretionary sector, as consumer activity should extend even more broadly throughout the sector’s various industries.
VF Corp (VFC) is a company that you might not recognize by its corporate name, but you almost certainly will by their brands. This is the company behind well-known apparel and footwear brands including The North Face, Vans, and Wrangler. It’s a better than even bet that you’ve bought their products before, and I’m even willing to go out on a limb and say that it’s a fair bet you have some of their products in your closet right now; I know I do. Like just about every other stock in this sector, the company had to absorb the complications and difficulties that come from an uncertain marketplace and economy; but they have also seen traction from their ability to position themselves as a performance-driven, lifestyle sports company. They also have managed to maintain a strong balance sheet even in the midst of pandemic conditions while dramatically reducing their reliance on department stores. This is also a company that has enjoyed the distinction of being a ‘dividend aristocrat,’ having increased their dividend for 47 years in a row before the pandemic prompted management to reduce it. As of this writing, the stock is about -20% below its pre-pandemic high at around $100, and also about -13% below its 52-week high at around $91, while appearing to consolidate at a level that could signal a resumption of an upward trend that actually started a year ago. With many economist and analysts predicting continued increases in consumer activity through the year as activities that haven’t been possible since before the pandemic picks back up, does that mean VFC is also a good value that long-term focused investors should pay attention to? Let’s find out.
Fundamental and Value Profile
V.F. Corporation is engaged in the design, production, procurement, marketing and distribution of branded lifestyle apparel, footwear and related products. The Company’s segments include Outdoor & Action Sports, Jeanswear, Imagewear and Sportswear. It owns a portfolio of brands in the outerwear, footwear, denim, backpack, luggage, accessory, sportswear, occupational and performance apparel categories. Its products are marketed to consumers shopping in specialty stores, department stores, national chains, mass merchants and its own direct-to-consumer operations. Its direct-to-consumer business includes VF-operated stores, concession retail stores and e-commerce sites. Its brands sell products in international markets through licensees, distributors and independently-operated partnership stores. Its brands primarily include The North Face, Vans, Timberland, Wrangler, Lee, and Kipling. VFC has a current market cap of about $31.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 170%, while revenues grew by nearly 23%. In the last quarter, earnings declined nearly -71% while sales were also about -13% lower. The last couple of quarters indicate the company’s margin profile has mostly absorbed the damage inflicted by COVID-19 and could be stabilizing; Net Income as a percentage of Revenues over the last twelve months was 4.41%, and weakened slightly to 3.47% in the last quarter.
Free Cash Flow: VFC’s free cash flow is a sign of strength, at a little over $1.1 billion over the last twelve months. This is a number that had persisted in negative territory since the first quarter of 2017, and was -$217.12 million at the beginning of 2019. I find it encouraging that Free Cash Flow has improved steadily from that point; in June 2020, for example Free Cash Flow was $626 million, and $920 million in the final quarter of last year.
Debt to Equity: VFC’s debt/equity ratio is high, at 1.87. A big portion of that debt came in 2020 as the company borrowed heavily to bolster its cash reserves in order to manage its way through the health crisis. As of the last quarter, the company reported $1.4 billion in cash and liquid assets against about $5.7 billion in long-term debt. It should be noted that at the beginning 2020, cash was around $1.3 billion versus $2.6 billion in long-term debt.
Dividend: VFC’s annual divided is $1.96 per share, which translates to a yield of 2.47% at the stock’s current price. in 2019, the dividend was $2.04 per share; however considering the difficulties that have become clear this year, the fact that the dividend has been maintained relatively close to that 2019 level is an interesting sign of management’s commitment to shareholder value.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $73 per share. That suggests that despite the company’s fundamental strengths, the stock remains overvalued by about -8%, with a bargain price around $58.50 per share. It is also worth noting that in the last quarter of 2020, my analysis offered a fair value target of $46.50. While this doesn’t change the stock’s immediate overvalued status, I do take the increase as another sign of increasing fundamental strength.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s upward trend from a low at around $57 a year ago to its May peak at around $91. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. VFC has dropped off of that high to find support at around $78, which is also right around the 38.2% retracement line and could offer a good technical springboard for a new rally back in the direction of the longer upward trend. Immediate support is now around $78, with the stock just a little above that level, and current resistance is at about $83. A push above $83 should give the stock enough momentum to push to about $88 and even to retest the peak around $91 if bullish momentum increases. A drop below $78 should find next support at $74, with tertiary support at the 61.8%% retracement line around $70 if the stock reverses downward and bearish momentum accelerates.
Near-term Keys: I think VFC’s fundamental profile in the face of the past year’s pandemic-induced economic conditions is a very interesting story – but unfortunately it doesn’t translate to a useful value as well. That means that the best opportunities to work with this stock lie in short-term trades. If the stock can push above current resistance at $83, you might consider buying the stock or working with call options, with about $5 of opportunity to the stock’s next resistance level at around $88 per share. A drop below support at $78, however could offer a good opportunity to think about shorting the stock or buying put options, using $74 as a useful, near-term profit target point on a bearish trade.
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