Dressed for Success: 3 Value Plays in Apparel
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Just like in an apparel store, one needs to dig deep to find value in the stock market. The greatest stocks are, on many occasions, not so easily visible. Below, you will find three companies that are undervalued in relation to their peers and potential.
Offering compelling growth prospects for the years to come, Iconix Brand Group (NASDAQ: ICON), Vera Bradley (NASDAQ: VRA), and Perry Ellis (NASDAQ: PERY) deserve a closer look. Be quick, before the market catches up to their fair values.
Iconix Brand Group licenses, markets, and provides trend direction for several consumer -- apparel and accessories -- brands around the world. Numerous joint ventures, including Iconix China, Iconix Latin America, Iconix Europe, OP Japan, and Iconix India provide extra revenue sources and are expected to contribute with larger shares over the upcoming years. Moreover, the firm continuously seeks to widen its portfolio through brand acquisitions and partnerships, having purchased about 1,000 licenses over the last decade.
Over the past three years, revenue has grown 15% and net income by over 13%. Comfortably surpassing industry average figures, Iconix has proven resilient to tough economic patches. Somewhat “moated,” the firm managed to deliver strong performances in the U.S. and Europe, even through the last crisis.
Emerging markets also provide plenty of opportunities for further growth. The company´s strategic joint ventures and partnerships are expected to drive earnings in overseas markets, especially in China (where early results look particularly promising), India, and Latin America, along with other major markets like Canada, Israel, and Australia. Management expects international sales to account for 33% of total revenue this year, up from 24% in 2012.
Furthermore, Iconix’s agreements with several retail giants, including Wal-Mart, Target, Kohl’s, and Macy’s, promise to contribute significantly to earnings in the years ahead, especially given the long-term and exclusive nature of the contracts.
On its way to becoming a leader in brand management, I’d recommend buying this stock before its valuation ceases to be attractive. Currently trading at 14 times consensus earnings, less than half the industry average, while offering an expected annual EPS growth rate of about 18%, the stock looks undervalued, thus offering a good entry point for investors.
Multi-channel means more income
Vera Bradley is a designer, producer, marketer, and retailer of trendy women’s apparel and accessories. A few days ago, the firm’s CEO, Michael C. Ray, announced his retirement and its stock plummeted. Although slowly recouping, its shares still trade very close to an all-time low.
Valued at only 13.5 times its earnings, this is definitely a good time to buy some Vera Bradley shares. Although undervalued in relation to its peers, the firm is still expected to comfortably outperform its competitors over the next five years, delivering an average annual EPS growth rate in the 14%-17% range.
My investment thesis here is based on the idea that the market overreacted to the news of Vera’s CEO leaving, thus opening a great entry point for investors. Beyond this fact, the company offers compelling growth prospects for the upcoming years. For starters, its multi-channel retail model reduces its dependence on one source of revenue, diversifying its risks. Moreover, this strategy provides the firm with great exposure to several markets, constantly strengthening its brand name.
Its management has proven successful in expanding the business through wise investments. Over the past few years, its focus has been on its retail segment. Results have been strong in both the online and offline channels, and a new retail-oriented CEO could boost these results further.
Vera's strong pricing power is another very attractive characteristic. Its regular clients are willing to pay full prices for its products, as they are led to believe that they will not be able to find that particular item in an Outlet store later. This has helped the firm attain industry leading margins, returns, and growth rates over the past few years.
Experience is knowledge
Perry Ellis is yet another apparel designer and manufacturer that licenses and markets its products around the world through several retail channels. Just like Vera, Perry trades at discount to its peers, at 20 times P/E, although analysts expect it to outperform its industry, retrieving an average EPS growth rate of 18% per annum over the next five years. Strong earnings last quarter (despite weak revenue) have kept the momentum intact; however, at current valuation, this stock looks like a buy to me.
My main reason to believe in the company’s growth is an intangible: its management. With critical experience in the segment, it has proven successful through 50 years of ups and downs in the industry.
Going forward, this alone makes me feel assured. However, other strong reasons can be pointed out, including a known brand and product offerings; a history of remaining hip (and getting the fashion right); a strong licensing model with huge clients like Macy’s and Kohl’s; and its acknowledgement for its high-end, trendy products, which makes its clients willing to pay a premium for the items.
Acquisitions and international expansion have and will play an increasingly important role in Perry’s growth. Plenty of cash available will help continue with fashion brand purchases, while international markets will provide plenty of expansion opportunities.
Although some might argue that the apparel segment's growth is capped, I believe it is just a matter of knowing where to look. The three companies described above provide great growth potential and visible catalysts at very attractive valuations. I´d recommend adding them to your investment portfolio.
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Damian Illia has no position in any stocks mentioned. The Motley Fool owns shares of Perry Ellis. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!