With persistently high inflation that has kept interest rates rising throughout the year, economically sensitive industries have been the most vulnerable. The Consumer Discretionary sector is a perfect example.
As reflected by the S&P 500 Consumer Discretionary Sector SPDR (XLY), the sector has followed the broad indices into its own bear market. This is a sector that includes a wide swath of business types typified by products and services of which consumers tend to buy less when economic conditions become more difficult. High inflation that creates a rising interest rate environment are exactly the kind of conditions that usually work against in this sector that typically includes specialty retailers and their suppliers.
While most growth-oriented investors will avoid these kinds of stocks under current market conditions, the flip side is that companies in these sectors, which may follow their sector into their own bear markets, eventually find a level at which value investors start to sit up and take notice. If the company has the underlying fundamental strength to also suggest that their long-term value opportunity is significantly higher, the argument for thinking about “swimming against the tide” of popular opinion starts to become compelling.
PVH Corp (PVH) is a good example. This is a stock that has dropped nearly -50% from its high in late 2021 at around $125 to is current level at around $53. That makes the stock one of the loss leaders in the sector over that period, to the point that it might be considered radioactive. Arguing against that notion is the fact that even in a broadly difficult economic environment, the company has a solid balance sheet, useful free cash flow, and a dividend that was reinstated earlier this year after having been suspended during the worst of the coronavirus pandemic. Are those positive fundamentals sufficient to make the stock a useful value-oriented opportunity right now? Let’s find out.
Fundamental and Value Profile
PVH Corp. is an apparel company. The Company operates through three segments: Calvin Klein, which consists of the Calvin Klein North America and Calvin Klein International segments; Tommy Hilfiger, which consists of the Tommy Hilfiger North America and Tommy Hilfiger International segments, and Heritage Brands, which consists of the Heritage Brands Wholesale and Heritage Brands Retail segments. The Company’s brand portfolio consists of various brand names, including Calvin Klein, Tommy Hilfiger, Van Heusen, IZOD, ARROW, Warner’s, Olga and Eagle, which are owned, and Speedo, Geoffrey Beene, Kenneth Cole New York, Kenneth Cole Reaction, Sean John, MICHAEL Michael Kors, Michael Kors Collection and Chaps, which are licensed, as well as various other licensed and private label brands. The Company designs and markets dress shirts, neckwear, sportswear, jeanswear, intimate apparel, swim products and handbags, footwear and other related products. PVH has a current market cap of $3.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased about -25.5%, while sales also dropped, by nearly -8%. In the last quarter, earnings improved by 7.22%, while revenue growth was flat, but positive, by 0.44%. The company’s margin profile is a concern, and reflects broader economic conditions that have raised inputs costs for companies throughout the economy; over the last twelve months, Net Income was 10.19% of Revenues and declined to 5.41% in the last quarter.
Free Cash Flow: PVH’s Free Cash Flow has struggled over the past year, but is still useful, at $309.5 million over the period. This is a number that has declined from $805 million nine months ago, and that translates to a Free Cash Flow Yield of 8.72%.
Debt to Equity: PVH has a debt/equity ratio of .41, which is a very conservative number. Their balance sheet shows $699.3 million in cash and liquid assets against $2.15 billion of long-term debt. Cash has dropped from a little more than $1.2 billion six months ago, but it is also worth mentioning that at the beginning of 2020, long-term debt was about $4.2 billion. While their margin profile, combined with cash flow suggests that servicing their debt isn’t a problem, continued declines in net income, free cash flow and liquidity could present long-term challenges.
Dividend: PVH pays an annual dividend of $.15 per share, which translates to a minimal dividend yield of just .28%. The stock’s dividend is not a defining reason to own the stock, but it is noteworthy that management suspended its dividend in 2020 to provide financial flexibility during the early stages of the pandemic, and reinstated it in the first quarter of this year.
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. All together, these measurements provide a long-term target at about $92 per share. That suggests that the stock offers about 70% from its current price, which is a very tempting value proposition.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: This chart displays the last year of stock performance for PVH. After peaking at around $125.50 in October of last year, the stock has dropped into a long-term downward trend, finding its low point earlier this month at around $53. After temporarily rallying to a pivot high at around $62, the stock lost momentum last week and is currently nearing expected, current support at $53, with immediate resistance expected at around $58. Using the distance between current support and resistance as a reference, a drop below $53 could see the stock fall to about $48 before finding next support, while a push above $58 should find next resistance at the last pivot high around $62.
Near-term Keys: Given the direction, and strength of the stock’s long-term trend, the highest-probability opportunity for a short-term trade is on the bearish side, either by shorting the stock or buying put options; a drop below $53 would be a good signal, with a target price at around $48 acting as a good profit point on a bearish trade. A bullish, short-term trade is very aggressive right now given the strength of the downward trend as well as the stock’s recent drop near its yearly low. That trend has also pushed the stock to levels that offers a very interesting value proposition; however the current declines in Net Income, Free Cash Flow and liquidity are a combination of concerns that I think warrant a more conservative approach. Wait for these numbers to show signs of improvement before taking PVH’s value proposition seriously.