During the last two years, one of the most interesting sectors of the market to pay attention to has been the Consumer Discretionary sector. This is a sector that is driven by consumer spending, which is generally highest when the economy is healthy. The COVID-19 pandemic shuttered all kinds of economic activity through much of 2020 and pushed unemployment numbers to levels not seen in decades. These are the kinds of factors that typically spell trouble for retail spending, but unprecedented federal stimulus money, including extended unemployment benefits that actually motivated workers to avoid re-entering the workforce actually countered most of the expected, bearish aspects of pandemic-driven restrictions and slowdowns.
I attribute at least a portion of the demand side of the sector’s resilience during that period to a general shift in consumer behavior to exercise outside and engage in more outdoor activities.
That gave stocks like Columbia Sportswear Company (COLM) a useful revenue base to weather the pandemic with; the company has seen material improvements in cash and liquid assets as well as free cash flow over the last two years that may have begun to moderate somewhat, but still remain well above pre-pandemic levels.
Over the last year, COLM’s stock price hasn’t seen the same kind of lift that its fundamentals have suggested should be in order; in fact, the stock has been following a long-term downward trend from a high at around $115 a year ago to its most recent, 52-week low to start this week at around $74. The decline has really accelerated in the last month, as the stock is a little more than -30% over that period. That doesn’t sound very encouraging, but if you frame that downward trend against the contrasting view of the company’s fundamental strength, the picture actually becomes pretty attractive for a long-term investor.
From a macroeconomic perspective, I think that even with inflation increasing, and rising uncertainty about global conditions driven primarily by Russia’s ongoing, unprovoked war in Ukraine, there is a lot to suggest that demand for outdoor lifestyle apparel and other goods is likely to remain healthy. COVID-19 isn’t going away, but appears to be moving to its endemic stage – where it is as much a part of “normal” as the flu, pneumonia, and the vaccinations and boosters that many of us already get on an annual basis against those diseases. That implies social and other activities will largely remain uninterrupted even as occasional spikes and swells in infections are likely to recur. For the average consumer, that mean vacations, weekend getaways, and other outdoor activities should continue to see healthy levels of consumer engagement, which means that demand for the kinds of products COLM specializes in should remain healthy.
The one big risk that I think is increasing in a lot of investor’s minds – and that frankly is the biggest contributor to the stock’’s current, strongly bearish momentum – is inflation. Whether driven by the impact of restricted natural gas and crude supply in Europe from Western sanctions against Russia, or ongoing supply issues, the fact is that increasing inflation, with accelerating interest rate increases expected through the rest of 2022 at some point should put a damper on economic activity, including the discretionary, disposable income that tends to get allocated to “lifestyle” products such as those COLM emphasizes. Does that mean you should consider COLM as a useful, long-term investment, or as a risky place to put your money right now? Let’s find out.
Fundamental and Value Profile
Columbia Sportswear Company is an apparel and footwear company. The Company designs, sources, markets and distributes outdoor lifestyle apparel, footwear, accessories and equipment under the Columbia, Mountain Hardwear, Sorel, prAna and other brands. Its geographic segments are the United States, Latin America and Asia Pacific (LAAP), Europe, Middle East and Africa (EMEA), and Canada. The Company develops and manages its merchandise in categories, including apparel, accessories and equipment, and footwear. It distributes its products through a mix of wholesale distribution channels, its own direct-to-consumer channels (retail stores and e-commerce), independent distributors and licensees. As of December 31, 2016, its products were sold in approximately 90 countries. In 59 of those countries, it sells to independent distributors to whom it has granted distribution rights. Contract manufacturers located outside the United States manufacture all of its products. COLM has a current market cap of $4.7 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 22.62%, while sales were 21.72% higher. Over the last quarter, earnings declined by -56.9% while sales were -32.59% lower. This negative pattern is confirmed by the company’s operating profile; over the last twelve months, Net Income was 11.19% of Revenues, and weakened to 8.87% in the last quarter.
Free Cash Flow: COLM’s Free Cash Flow has declined for most of the year, and stands at $165.99 million in the last quarter. This number was $410.33 million a year ago, and $434 million three quarters ago. The decline, which also coincides with the declining Net Income and earnings pattern, strongly indicates that rising input and materials costs are having a negative impact that isn’t being offset by sales or price increases.
Debt to Equity: COLM has a debt/equity ratio of 0; they have little to no long-term debt, and $610.26 million in cash and liquid assets. While cash is lower – from about $894 million a quarter ago – the fact is they still have a best-in-class balance sheet. For now, the company’s operating profiles suggest that COLM has no problem taking care of immediate cash needs, returning value to shareholders, and investing in future growth; however if earnings, Net Income, and Free Cash Flow continue to decline, cash will also continue to deteriorate, so this number is particularly important to pay attention to in upcoming quarters.
Dividend: COLM suspended its dividend in 2020 to preserve cash during the pandemic, but reinstated it after the first quarter of 2021, and raised it two quarters ago to its present level at $1.20 per share. That compares favorably to its pre-pandemic payout, which was $.96 per share. At the stock’s current price, its current payout translates to a modest dividend yield of 1.57%. It is also worth mentioning that their annual dividend payout ratio is conservative, representing less than 25% of their annual earnings per share.
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. All together, these measurements provide a long-term, fair value target at around $106 per share. That means that the stock is very nicely undervalued right now, with 40% upside from its current price. It also bears mentioning that my last analysis on this stock yielded a fair value price at $118 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays the last year of price activity; the red diagonal line traces the stock’s downward trend from a November 2021 high at around $107.50 to its its latest low, reached this morning at around $74. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s bearish momentum has increased significantly since the end of April, marking immediate resistance at around $79.50 and current (albeit uncertain) support at around $74. A push above $79.50 should have upside to about $84.50, while a drop below $74 could have continued downside below $70.
Near-term Keys: The stock’s increasing bearish momentum makes short-term trading strategies in this stock very one-sided right now; use a drop below $74 as a signal to consider shorting the stock or buying put options, with a useful target price at around $69.50 per share. A pivot off of current support could provide an aggressive, even speculative signal to buy the stock or work with call options, using $79.50 as a practical short-term target on a bullish trade. While COLM’s value proposition is compelling, the current declines in earnings, Net Income and Free Cash Flow, along with the stock’s current momentum, raise enough questions to make waiting to see all four elements begin to stabilize before considering using the stock as a practical, value-driven opportunity.