I find it interesting that even when conditions are uncertain, there are companies in normally cyclical industries 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 (which, at about 5.2% as of last week’s report, is still well above pre-pandemic levels) demonstrate clear weakness in the broad economy. Last year, stay-at-home orders included shuttering or limiting access to gyms, and changed work life for white-collar workers to long-term remote arrangements. That 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 for hope even as infection and hospitalizations are once again straining capacity limits in the health care sector.
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 Timberland. 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 has 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.
Since hitting a 52-week high price in April at around $91, the stock has seen bearish momentum force the stock dramatically lower; in fact, this week that momentum has begun to accelerate, with the stock dropping about $4 on Tuesday on the heels of news that a member of the company’s board of directors was stepping down. The strongly bearish turn is generally enough to make bullish, growth investors look at this stock as “radioactive,” but for value-oriented investors, the decline starts to beg the question of where the stock’s useful bargain might actually be. Let’s dig in and try to 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 $28.2 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased a little over 147%%, while revenues grew by nearly 104%. In the last quarter, earnings were flat, at exactly 0% while sales were also about -15% lower. The last couple of quarters indicate the company’s margin profile has mostly absorbed the damage inflicted by COVID-19 and has reversed to healthy, strengthening levels; Net Income as a percentage of Revenues over the last twelve months was 9.83%, and strengthened nicely to 14.77% in the last quarter.
Free Cash Flow: VFC’s free cash flow is a sign of strength, at a little under $1.2 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 a year ago. This is also a strong confirmation of the favorable Net Income pattern described above.
Debt to Equity: VFC’s debt/equity ratio is high, at 1.44. 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 $1.87 billion in cash and liquid assets against about $4.7 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 2.57% 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 a useful sign of management’s commitment to delivering 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 $67.50 per share. That suggests that despite the company’s fundamental strengths and the stock’s current, accelerating bearish momentum, the stock remains overvalued by about -6%, with a bargain price around $54 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 overall increase as another sign of increasing fundamental strength.
Technical Profile
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 $66 in November 2020 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. The stock had been holding at solid support in the $75 price range until yesterday, when the stock shed more than $4 per share in a single session. That puts immediate resistance back at the $75 level, with nearest expected support at around $69 per share. The stock’s current momentum means that any bounce off of support should have between $4 and $6 of near-term upside to $75, while a drop below $69 should see the stock test the $66 low point of the past year.
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. Even short-term trades are a little hard to identify right now, at least on the bullish side; the stock’s collapse below support means that until an actual support bounce is seen, the stock is more likely to continue falling. If you want to use the drop below support at $75 as a signal, you could think about shorting the stock or buying put options, using $69 as a first-hit, bearish profit target, and $66 within range if bearish momentum remains strong.