This Apparel Giant Looks Quite Expensive Now
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I am often worried about companies that have experienced a huge amount of insider sales, as it could indicate that insiders might not be bullish about their own companies anymore. Recently, Emanuel Chirico, Chairman and CEO of PVH Corp (NYSE: PVH), sold 47,296 shares of the company, with the total transaction worth nearly $5.7 million. In addition, COO and CFO, Michael Shaffer, also divested 19,000 shares on the market, with a total value of nearly $2.3 million. Let’s take a closer look to determine whether or not investors should be bearish about this stock.
PVH, with more than 130 years in operation, is considered one of the biggest apparel companies in the world, owning a lot of famous brands including Calvin Klein, Bass, Van Heusen, and Tommy Hilfiger. The company operates three main businesses: Tommy Hilfiger, Calvin Klein, and Heritage Brands. Most of its operating income, nearly $421 million, or more than 63.7% of the company's total operating income, was generated from the Tommy Hilfiger business, while the Heritage Brands and the Calvin Klein businesses contributed $114.6 million and $284.7 million, respectively, in operating profits. The business has a quite concentrated customer base, with the five largest customers accounting for 18.7% of total revenue. The biggest customer is Macy’s, representing around 8.7% of PVH’s total sales in 2012.
The full control of Calvin Klein brand
In the past ten years, PVH has expanded its business footprint in the apparel industry by acquiring Calvin Klein in 2003, Tommy Hilfiger in 2010, and Warnaco in 2013. Since Warnaco is the biggest licensee for Calvin Klein products, the $2.9 billion acquisition of Warnaco unifies the Calvin Klein brand, giving PVH direct global control of this brand with two main product categories: jeans and underwear. PVH could benefit from Warnaco’s fast-growing emerging market operations in Asia and Latin America. Moreover, PVH could also leverage its expertise and infrastructure in the developed markets to potentially improve the Calvin Klein jeans and underwear business. For the full year 2013, the company expects to generate around $8.2 billion in revenue, while the operating margin might come in at around 14%, a bit lower than 2012 due to the move from licensing to direct operation of Calvin Klein's overall business. PVH estimated that its full year EPS might stay around $7 per share.
It's richly valued
At $126 per share, PVH is worth around $10.2 billion on the market. The market values PVH at as high as 14.2 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization). Compared to its peers, including Ralph Lauren (NYSE: RL) and VF Corporation (NYSE: VFC), PVH is the most expensively valued.
Ralph Lauren is trading at around $172.80 per share, with the total market cap of $15.7 billion. The market values Ralph Lauren the cheapest, at only 10.65 times its trailing EBITDA. In the first quarter, Ralph Lauren had quite good earnings results. While the revenue experienced a small growth of only 1.2% to $6.76 billion, the net income rose by as much as $10.1% to $750 million, or $8 per share. Looking forward, the company expects good growth in the next few years, growing its global store base network and e-commerce platform. The company also has a plan to drive its business in China by providing consumers the “pyramid of brands,” letting consumers have more options to choose Ralph Lauren’s products from the entry level, moving up to the most expensive product lines.
VF Corp also has a higher valuation than PVH. It is trading at $193.80 per share, with the total market cap of $21.2 billion. The market values VF Corp at around 12.8 times its trailing EBITDA. VF Corp has been growing its business by acquiring other apparel and footwear companies, then integrating those businesses into VF Corp for cost and operational synergies, driving overall business organic growth. Recently, the company announced its global growth strategy to 2017. VF Corp expects that it can deliver $17.3 billion in revenue and $18 earnings per share by 2017, with spectacular growth in the Outdoor & Action Sports, direct-to-consumer, and international business segments. The annual operating cash flow was estimated to come in at $2.4 billion. Consequently, the cumulative operating cash flow might reach $9.5 billion in the period of 2013-2017. With the expected strong potential growth, VF Corp targeted a dividend payout ratio of around 40%, reaching the annual total shareholder return of 15%.
My Foolish take
PVH would continue to experience decent growth with the acquisition of Warnaco, delivering shareholders a good return in the long run. However, the valuation seems to be quite rich at its current trading price. The huge insider sale should make investors cautious before initiating a long position in this stock. Personally, I would rather wait for future price corrections before investing in the company.
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