One of the themes of most of 2021 has come as investors and economists have tried to look past the difficult conditions imposed by the COVID-19 pandemic and forecast the best places to look for new investing opportunities. It’s often called the “reopening trade,” referring to the industries and stocks that may be best positioned to take advantage of the expected resumption of “normal” economic activity. That theme seemed to be taking hold just a few months ago, as infections and hospitalizations had started to decrease, and various economic indicators showed that economic activity was, in fact, beginning to show signs of recovery.
While the last few months have brought the health crisis back into view, economic indicators are still showing plenty of economic growth, to the point that the Fed has started to include discussions and commentary about ending aspects of its accommodative interest rate policy that have helped keep money flowing through the system over the last two years. Unemployment claims continue to drop, and while still above pre-pandemic levels, sizable improvement in this metric points to continued growth, while consumer price increases add to the implication that inflation fears aren’t a short-term question.
Yesterday, I highlighted VF Corp (KTB) in this space. Today, I want to turn the focus to a company KTB spun off in 2019 using recognizable apparel brands Wrangler, Lee and Rock & Republic. This is a stock that saw a big push higher from October of last year to a little above $69 in May of this year, then slid into a downward trend that finally found bottom in October at around $48 per share. The stock has picked up a lot of bullish momentum from that point, driving 20% higher now sitting only about 13% its May high. The company’s fundamental profile shows generally healthy free cash flow, manageable debt with improving liquidity, and an attractive dividend. Are those elements enough to a provide a value proposition that you should be paying attention to, or has the stock already outpaced its potential bargain price? Let’s find out.
Fundamental and Value Profile
Kontoor Brands, Inc. is a global apparel company. The Company is focused on the design, manufacturing, sourcing, marketing, and distribution of its portfolio of brands, including Wrangler, Lee and and Rock & Republic. It sells its products primarily through its wholesale and digital channels. Its distribution channels include United States (U.S.) Wholesale, Non-U.S. Wholesale, Branded Direct-to-Consumer and Others. Wrangler offers denim, apparel, and accessories for men and women. Lee is a denim and apparel brand. Lee product collections include a range of jeans, pants, shirts, shorts, and jackets for men, women, boys and girls. Rock & Republic is a premium apparel brand. Rock & Republic products are sold in the United States exclusively through Kohl’s. It also owns and operates other various brands worldwide, which include Gitano and Chic. KTB has a current market cap of about $3.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined -3.76%, while revenues grew by almost 12%. In the last quarter, earnings were 220% higher, while sales increased by almost 33%. KTB’s operating profile is showing useful signs of strength; over the last twelve months, Net Income was 7.93% of Revenues and increased to 9.72% in the last quarter.
Free Cash Flow: KTB’s free cash flow is $275.6 million over the last twelve months. That marks a decline from $312.5 million in the quarter prior, but an increase from $179.58 million a year ago. The current number also translates to a Free Cash Flow yield of 7.97%.
Debt to Equity: KTB’s debt/equity ratio is high, at 4.19. That sounds alarming, but it is also misleading. As of the last quarter, the company reported $215 million in cash and liquid assets against about $773 million in long-term debt. The company’s strengthening operating profile, along with generally healthy free cash flow suggest that servicing their debt isn’t a problem.
Dividend: KTB’s annual divided is $1.84 per share, which translates to a yield of 3.07% at the stock’s current price. This is a bit unusual when you consider that the company has only existed as a public entity for about two years; I take the dividend as a positively inherited characteristic from parent company VFC, which has a long history of returning value to shareholders via consistent dividend distributions. The current annual payout also marks an increase from $1.60 per share, announced by management after its last earnings report.
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 $58.50 per share. That suggests that despite the company’s fundamental strengths and the stock’s current bullish momentum, the stock is a bit overvalued by about -2%, with a bargain price around $47 per share. It is also worth pointing out that a quarter ago, this same analysis yielded a fair value target at $49 per share.
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 $35 in November 2020 to its May peak at around $69. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After finding a trend low at around $48 where the 61.8% retracement line sits, the stock reversed its momentum and has been following a strong, consistent trend higher, driving above the 38.2% retracement line to start this month. Immediate resistance is around $61 based on a high reached earlier this week, with current support at around $59. A push above $61 should have short-term upside to about $64 based on pivot activity in May and June, while a drop below $59 should find next support at around $56 where the 38.2% retracement line sits.
Near-term Keys: I think KTB’s fundamental profile, like its parent company in the face of the past year’s pandemic-induced economic conditions is a very interesting story – but unfortunately the stock’s strong one-month rally means that it doesn’t translate to a useful value. The stock’s current activity could offer some interesting signals to work with short-term trades. A drop below $58 would offer a useful signal to consider shorting the stock or buying put options, with useful bearish profit targets at around $56 per share. A push above $61 would be a good signal to think about buying the stock or working with call options, with a practical bullish target at around $64.