Can Michael Phelps Resuscitate this Stock?
Liz is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
"Swimmers, take your mark." These are the words that Michael Phelps will hear time and again at the Summer Olympics in London, when he takes his place at the starting blocks. They are also the very same words that I heard every summer as a kid, when I swam competitively all across the Northeast. I still swim today and so those words, a Lycra swim cap, goggles and a racing suit made by Speedo are what Mr. Phelps and I have in common. And as you might've guessed, our similarities end there. Except that for both of us, Speedo and swimming are words that go together like chlorine and pools.
Speedo is coming out with a new racing suit called the FastSkin3 which will make its debut on Saturday, July 28th when the swimming competition begins. Phelps and Lochte have sung the praises of this breakthrough technical suit, gushing respectively "I feel like a torpedo" and "now I am a single force, I am unstoppable." The suit has been shrouded in secrecy so we'll just have to wait and see, but let's just say that the suit is that amazing and helps to springboard Team USA to unfathomable human swimming speeds. Then the question becomes will this Olympian endorsement and world-wide attention on brand Speedo serve to revitalize sales of parent Company Warnaco, and help resuscitate this floundering stock?
Warnaco (NYSE: WRC) is a global apparel player with brands in swim wear, sportswear, and intimate apparel. The flagship brands that we'd recognize are Speedo, Calvin Klein, Chaps, Warner's and Olga. Warnaco distributes via domestic and international wholesalers and products reach consumers by way of major department stores, independent retailers, chain stores, mass merchandisers, the Internet and dedicated retail stores (this is a partial list.) Some competitors of Warnaco in the apparel sub-category would be V.F. Corp (NYSE: VFC), The Limited (NYSE: LTD), Jones New York (NYSE: JNY) and Maidenform (NYSE: MFB). Warnaco has a market cap of $1.7B, and while over five times the textile-apparel clothing industry market cap average of $292.68M, it's still much smaller than the market caps of VFC ($16.5B) and LTD ($13.5B.)
As far as fundamentals go, Warnaco's stock price has sunken to rock-bottom levels, with an all-time low of $39.56 set on July 17th of this year, down 34.81% from the high of $60.69 reached back in February. Further, back on May 30th Warnaco under-delivered on Q1 earnings at .90/share, off from a consensus estimate of .92/share. Bad news to further consider, WRC ranks below industry averages on some important metrics, and a significant one being EPS growth (ttm) at -10.5% vs. +23.5% (ttm) for the industry. However, relative to JNY with negative EPS growth of -42.6%, (ttm) and MFB with EPS growth at -48.3% (ttm) Warnaco looks much stronger. But if it's dividends that float your boat, Warnaco hasn't paid them since 2010, (same story at MFB) and plans have not been announced to reinstate them. Competitors LTD, VFC, and JYN all pay dividends. JNY has a annualized yield of 1.97%; comparable to VFC at a 1.92% yield. LTD is the strongest in the heat with a 2.19% annualized yield and a share repurchase plan in place for 2012.
So what's the good news that may save this stock from drowning? Well, despite the poor EPS performance (ttm), for the last five years WRC edged out the industry slightly with +13.90% EPS growth vs. 13.23%. And earlier this month management announced that they were going to revamp European operations. I find this very positive news since European sales account for 56.1% of net revenues and given the state of flux overseas, revamping those operations makes perfect sense. The other news which may proffer this a stock to consider would be WRC's forward EPS three to five year growth is projected at 12.11% only slightly lower than industry projections for the same period at 14.06%. Also, some analysts have projected a low target share price of $46 and a high target share price of $66, and so at a close of $40.46 per share Tuesday July 24th, the buy opportunity may indeed be now.
While clearly not as exciting as the prospect of Phelps and team in the new Speedo Fastskin3 breaking all sorts of swimming records, if you do buy Warnaco now at these low levels, in the long-term it may prove medal-worthy. But you've gotta embrace some short-term risk and be comfortable treading water for awhile. And so if that's not your speed, then just sit back in the bleachers and watch. But either way you've got to cheer Go Team USA!
CoachLizzy is long LTD and has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.