VF Corporation – Almost A Buy
|February 8, 2017||Posted by Oddmund Grøtte under Stock Analysis|
VF Corporation (VFC) this month traded below 50 USD. V.F. Corporation is a quite anonymous company, at least for us non-US residents. However, their brands are certainly not unknown: NorthFace, Timberland, Lee, Wrangler, Vans etc. Below is a very brief analysis:
The stock has gradually been going down since July 2015 when it reached a peak of about 75 USD. Today it is trading below 50 at 48.5, the same price as in the summer of 2013. VFC is a high-quality company with an S&P credit rating of A and very little debt. It’s been a stable grower with EPS growth of 9% over the last 10 years. However, since late 2013 until summer of 2015 the stock got a little ahead of itself and became overvalued (my opinion). The stock simply deviated from the EPS growth. What we see now is just a regression to the mean.
VFC just increased the quarterly dividend to 42 cents a share. This gives a yield of about 3.4%. Bear in mind that VFC is a dividend aristocrat: It has increased its dividend for the last 44 years! Dividend payments has increased 10.7% annually over the last ten years! The payout ratio is still just over 50%.
I believe the reason for the weak stock price is due to these reasons:
- Overvaluation in 2013-2015
- Potential border tax from Trump
- Weak physical retail sales (Amazon)
- The 17×17 plan from 2012 not going as planned
On their website they have a presentation called 17*17. Margins are lower than these estimations, sales is lower and EPS is lower. This might explain why share price is going down.
Capex is very low, which I like. Average capex to revenue is 2.2% (I prefer less capital intensive companies). On average 10 cents of every dollar in turnover is turned into free cashflow. For a company in this business this is a very good number. However, retail is a very hard business. No wonder Buffett does not like retail. Amazon has over the last years crushed retailers, which might be the reason VFC has had weak sales in the US. Most of their brands still have solid growth in both Europe and Asia. ROIC has averaged 12.5% over the last ten years.
Based on 2016 results the P/E is about 16. Depending on growth 2017 earnings will be around 14-15. Compared to other stocks this is not high for such a solid company. Hopefully VFC continues buying back shares at these levels. Going forward I suspect dividend growth will slow down to 5-10%. However, that is still good.
From the latest report I think it’s premature to conclude a weakness in their business, and I believe a lot of negative factors have already been discounted in today’s price. However, I would like to buy around 40-42 to allow for some margin of safety. I will most likely issue puts with strike 42.5 with expiration in May or August. May expiration with strike 42.5 is now around 0.8 USD. Options are thinly traded and not much open interest. That premium equals annual yield of around 7%.
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