Feature Industry Review

The Best Companies of the Apparel Industry – June 2015 $GPS $HBI $KORS $RL $VFC

Copy of Best Companies of the Apparel IndustryWhile ModernGraham supports the bottom-up approach to investing, many investors do utilize the top-down method, whereby an industry is selected before the company itself.  With that in mind, this article will take a brief look at the best companies of the apparel industry, selecting the most promising investment opportunities within the industry, and giving a broad look into the industry as a whole.

Out of the more than 540 companies reviewed by ModernGraham, 10 were identified as being closely related to the apparel industry.  Of those, only one is suitable for the Defensive Investor, eight are suitable for the Enterprising Investor, and the remaining one is considered speculative at this time.  Excluding any extreme outliers, the average company was rated as being priced at 107.89% to its MG Value (estimated intrinsic value), with an average PEmg ratio of 23.85.  The industry as a whole, therefore would appear to be fairly valued, particularly in comparison to the market (see Mr. Market’s Mental State).

The Elite

The following companies have been rated as undervalued and suitable for either the Defensive Investor or the Enterprising Investor:

Gap Inc. (GPS)

200px-Gap_logo.svgGap Inc. is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio and the high PB ratio, while the Enterprising Investor has no initial concerns. Therefore, all Enterprising Investors should feel very comfortable proceeding with the next stage of the analysis, which is a determination of an estimate of intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $1.59 in 2012 to an estimated $2.63 for 2016. This level of demonstrated growth outpaces the market’s implied estimate for earnings growth of 2.94% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 13%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value well above the current price, indicating Gap Inc. is significantly undervalued at the present time.  (See the full valuation)

Hanesbrands Inc. (HBI)

HanesBrandsHanesbrands Inc. qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short dividend history, and the high PEmg and PB ratios.  The Enterprising Investor is only initially concerned by the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with the evaluation.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.46 in 2011 to an estimated $1.07 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 9.13% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.  (See the full valuation)

Michael Kors Holdings (KORS)

MK_COOL_GRAY_7CMichael Kors is not suitable for Defensive Investors but it does pass the initial requirements of the Enterprising Investor. The Defensive Investor is concerned with the short operating history, lack of dividends, and the high PB ratio, while the Enterprising Investor’s only concern is the lack of dividends. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to that valuation, it is critical to consider the company’s earnings history. In this case, it has grown its EPSmg (normalized earnings) from $0.19 in 2011 to $2.81 for 2015. This is a fairly strong level of demonstrated growth, and outpaces the market’s implied estimate for annual earnings growth of only 3.82% over the next 7-10 years.

In recent years, the company’s actual growth in EPSmg has averaged considerably more than the market’s estimate annually, and while the ModernGraham valuation model reduces the actual growth to a more conservative figure when making an estimate, the model still returns an estimate of intrinsic value well above the current price, indicating that Michael Kors is significantly undervalued at the present time.  (See the full valuation)

Ralph Lauren Corporation (RL)

Ralph_Lauren_CorporationRalph Lauren performs well in the ModernGraham model and is suitable for both Defensive and Enterprising Investors. The Defensive Investor is only concerned with the poor PB ratio, while the Enterprising Investor has no initial concerns. As a result, all Enterprising Investors should feel very comfortable proceeding to the next part of the analysis, which is a determination of the company’s intrinsic value.

When it comes to valuation, it is critical to consider the company’s earnings history. In this case, the company has grown its EPSmg (normalized earnings) from $4.76 in 2011 to an estimated $7.81 for 2015. This is a strong level of growth and is well above the market’s implied estimate of only 4.33% annual earnings growth over the next 7-10 years.

Here, actual growth in EPSmg over the last several years has averaged nearly 9.6% annually, so the market is expecting a very significant drop in earnings growth. The ModernGraham valuation model reduces the historical growth to a more conservative figure, assuming that some slowdown will occur, but still estimates a growth figure much higher than the market’s implied rate. Therefore, the model returns an estimate of intrinsic value well above the current price, indicating the company is significantly undervalued at the present time.  (See the full valuation)

The Good

The following companies have been rated as fairly valued and suitable for either the Defensive Investor or the Enterprising Investor:

VF Corporation (VFC)

Vfc-lVF Corporation is suitable for the Enterprising Investor but not the more conservative Defensive Investor. The Defensive Investor is concerned by the low current ratio and the high PEmg and PB ratios, while the Enterprising Investor has no initial concerns. Therefore, all Enterprising Investors should feel very comfortable proceeding with the next stage of the analysis, which is a determination of an estimate of intrinsic value.

From a valuation side of things, the company has grown its EPSmg (normalized earnings) from $1.49 in 2011 to an estimated $2.69 for 2015. This level of demonstrated growth is in line with the market’s implied estimate for earnings growth of 8.75% over the next 7-10 years.

The company’s recent earnings history shows an average annual growth in EPSmg of around 16%. The ModernGraham valuation model reduces such a rate to a more conservative figure, assuming some slowdown will occur, but still returns an estimate of intrinsic value falling within a margin of safety relative to the current price, indicating VF Corporation is fairly valued at the present time.  (See the full valuation)

The Full List

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Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AEO American Eagle Outfitters E 8/6/2015 $2.44 $17.68 724.59% 25.26 2.83%
GPS Gap Inc E 6/9/2015 $74.14 $34.89 47.06% 13.27 2.64%
HBI Hanesbrands Inc. E 7/27/2015 $41.02 $28.63 69.80% 26.76 1.40%
KORS Michael Kors Holdings Ltd E 6/25/2015 $108.19 $43.84 40.52% 15.60 N/A
NKE Nike Inc E 5/11/2015 $74.61 $114.53 153.50% 38.69 0.98%
PVH PVH Corp S 4/2/2015 $143.95 $113.80 79.06% 28.81 0.13%
RL Ralph Lauren Corp D 6/15/2015 $216.36 $120.20 55.56% 15.39 1.66%
UA Under Armour Inc E 7/27/2015 $33.19 $97.95 295.12% 113.90 N/A
VFC VF Corp E 6/5/2015 $88.40 $75.80 85.75% 28.18 1.69%
WWW Wolverine World Wide, Inc. E 6/18/2015 $19.42 $28.10 144.70% 22.66 0.85%

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To view the MG Value and PEmg information,  you must be logged in as a premium member.  Clicking on the company name will take you to the company’s latest valuation.

Ticker Name with Link Investor Type Latest Valuation Date MG Value Recent Price Price as a percent of Value PEmg Ratio Div. Yield
AEO American Eagle Outfitters E 8/6/2015 $17.68 2.83%
GPS Gap Inc E 6/9/2015 $34.89 2.64%
HBI Hanesbrands Inc. E 7/27/2015 $28.63 1.40%
KORS Michael Kors Holdings Ltd E 6/25/2015 $43.84 N/A
NKE Nike Inc E 5/11/2015 $114.53 0.98%
PVH PVH Corp S 4/2/2015 $113.80 0.13%
RL Ralph Lauren Corp D 6/15/2015 $120.20 1.66%
UA Under Armour Inc E 7/27/2015 $97.95 N/A
VFC VF Corp E 6/5/2015 $75.80 1.69%
WWW Wolverine World Wide, Inc. E 6/18/2015 $28.10 0.85%

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Disclaimer:
 The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logos taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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