Uncertainty in the financial markets, and in the economy is usually considered a bad thing, because it makes things more difficult and stressful for everybody. Fear about inflation and whether the Fed will move to aggressively raise interest rates or take a more moderated approach, along with the ongoing conflict between Russia and Ukraine, and its global, economic and geopolitical repercussions have, at least for the time being, taken over market commentary. The bearish momentum has been strong enough to push the major indices into their own bear market lows in the last month. Even while investors seem to have been looking for reasons to buy the market and see it stabilize since then, I think that there are plenty of reasons right now for the market to remain uncertain, which means that we can expect broad market volatility to be elevated for the time being.
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 of the past two years 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 while consumer prices increase. The latest consumer price numbers suggest that prices have increased dramatically since 2021, which is just one of the reasons the Fed has raised interest rates twice so far in 2022, with additional increases forecast. Rising interest rates are one of the biggest things that the market is afraid of, and that usually reflects negatively for stocks in the Consumer Discretionary sector – but the last two years have also shown an interesting shift in the narrative for some of these companies that belies traditional wisdom.
Stay-at-home orders in early 2020 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 driven, not just by an increased interest in staying fit, but also by remote workers who realized they could dress as comfortably as they wished to work from home, which provided a useful tailwind for apparel companies and also for their stock prices through 2021.
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 Dickies, 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 or dresser drawer 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 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 2021 at around $91, the stock saw bearish momentum force the stock dramatically lower, hitting a downward trend low at around $44 in May of this year. Since then, the stock has rallied by almost 14% to its current level at around $50. Could that mean the stock is poised to reverse its downward trend and now offers a good opportunity for value-oriented investors to buy a good company at a nice price, or is the broader bearish momentum a sign that you should stay away for the time being? Let’s dig in and 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 $19.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased almost 67%, while revenues grew by about 9.4%. In the last quarter, earnings were nearly -67% lower, while sales declined by about -22%. The company’s operating margins have seen some material signs of weakness lately that I think are attributable to broad inflationary pressures that are driving up input costs for nearly every sector of the economy. Net Income as a percentage of Revenues over the last twelve months was 11.71%, and weakened sharply to 2.86% in the last quarter.
Free Cash Flow: VFC’s free cash flow is generally healthy despite its decrease over the past year. It was $618 million in the last quarter versus $1.11 billion three quarters ago. 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. It is generally encouraging to understand that even with the decline this year, Free Cash Flow has improved steadily from that point; in June 2020, for example Free Cash Flow was $626 million. Even so, the pattern of the last few quarters, combined with the recent, sharp decline in Net Income is a big red flag.
Debt to Equity: VFC’s debt/equity ratio is high, at 1.3. 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 $1.275 billion in cash and liquid assets against about $4.6 billion in long-term debt. It should be noted that at the beginning of 2020, cash was around $1.3 billion versus $2.6 billion in long-term debt.
Dividend: VFC’s annual divided is $2.00 per share, which translates to a yield of 3.99% at the stock’s current price. in 2019, the dividend was $2.04 per share; however considering the difficulties imposed by pandemic conditions, 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. It is also worth noting that late last year, management increased the dividend from $1.96 per share.
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 $52 per share. That suggests that despite the company’s fundamental strengths, the stock is only slightly undervalued, by about 4%, with a bargain price at around $42 per share. It is also worth noting that this same analysis offered a fair value target of about $67 in late 2021 and $59 earlier this year.
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 downward trend from a peak at around $85 in July of last year to its recent low at around $44. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock found what may be a bearish trend low at around $44 last month, as the stock has rallied to its current price at around $50 from that point; however practically speaking, it would need to push above $60, where the 38.2% retracement line sits, to confirm that trend reversal. In the meantime, current support is around $47, with immediate resistance at $51. A push above $51 should find next resistance at around $55, while a drop below $47 should retest the stock’s 52-week low at around $44.
Near-term Keys: I think VFC’s fundamental profile in the face of the past two year’s pandemic-induced economic conditions is an interesting story – but there are rising concerns in the narrative to be concerned about in the form of declining Free Cash Flow and liquidity as well as the last quarter’s sharp decline in Net Income. Those concerns are enough to reinforce the fact that the stock doesn’t translate to a useful value. If you prefer to work with short-term strategies, a push above $51 could offer an interesting, if speculative signal to think about buying the stock or working with call options, using $55 as a practical bullish profit target. A drop below $47 would be a useful signal to consider shorting the stock or buying put options, with a practical profit target at around $44 on a bearish trade.
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