VFC is down 28% from its peak - but that doesn’t make it a good buy yet

January 1, 2019

VFC is down 28% from its peak – but that doesn’t make it a good buy yet

Moving into a new year means new resolutions, new goals, and excitement for new opportunities that lie ahead. The end of 2018 marked the first year in a decade that the stock market closed in negative territory. The S&P 500’s decline for the entire year was a little more than -5%, which might not seem like too much of a big deal by itself; but the real story is the fact that after hitting its most recent all-time high in September, the market tested legitimate bear market territory before rallying back to close the year down 13% from that peak.

What does that mean for 2019? There are a lot of questions out there about whether the economy will be able to maintain the growth numbers that have persisted for the last ten years, or whether global slowdowns will extend to the U.S. market. What role will geopolitics play in the market in the year ahead? In Europe, the future and ultimate outcome in Brexit is anything but decided, and while President Trump’s assertions that trade negotiations with China are positive seems to be giving the market some hope regarding tariffs and global trade, that remains a lingering element of uncertainty as well. Factor in domestic issues that include a continued, partial government shutdown along with the ever-present questions about interest rates, and while you might like to say that 2019 could be a good year for the economy and the stock market, it is anything but a given.



An uncertain market landscape tends to push a lot of stocks down to interesting price levels, which means that if you want to take long-term approach to the investments you make, the longer a market decline lasts, the more tempting it becomes to start snapping up stocks at lower prices. I think that temptation becomes even greater for companies that you’re familiar with, or that produce goods and services that you use on a regular basis.

VF Corp (VFC) is a company that you might not recognize by its corporate name, but you almost certainly will by their brands. This is the company behind well-known apparel and footwear brands including The North Face, Vans, and Wrangler. It’s a better than even bet that you’ve bought their products before, and I’m even willing to go out on a limb and say that it’s a fair bet you have some of their products in your closet right now; I know I do. The stock is also down about 28% from its all-time high in August a little above $97 per share. Does the fact that you might use the company’s products, along with the stock’s price performance mean they’re a good stock to pay attention to right now? Let’s take a look.



Fundamental and Value Profile

V.F. Corporation is engaged in the design, production, procurement, marketing and distribution of branded lifestyle apparel, footwear and related products. The Company’s segments include Outdoor & Action Sports, Jeanswear, Imagewear and Sportswear. It owns a portfolio of brands in the outerwear, footwear, denim, backpack, luggage, accessory, sportswear, occupational and performance apparel categories. Its products are marketed to consumers shopping in specialty stores, department stores, national chains, mass merchants and its own direct-to-consumer operations. Its direct-to-consumer business includes VF-operated stores, concession retail stores and e-commerce sites. Its brands sell products in international markets through licensees, distributors and independently-operated partnership stores. Its brands primarily include The North Face, Vans, Timberland, Wrangler, Lee, and Kipling.VFC has a current market cap of about $28.3 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased more than 16%, while revenues improved a more than 11%. The picture got much better in the last quarter, as earnings increased 232%, while sales increased 40%. The company’s margin profile is an indication of strength, as Net Income as a percentage of Revenues over the last twelve months was nearly 6.19%, but more than doubled in the last quarter to almost 13%.
  • Free Cash Flow: VFC’s free cash flow is a red flag, at -$217.12 million over the last twelve months. This is a number that has persisted in negative territory since the first quarter of 2017 and should act as a counter against the stock’s impressive earnings numbers.
  • Debt to Equity: VFC’s debt/equity ratio is conservative, at .51. As of the last quarter, the company reported $352 million in cash and liquid assets against about $2.15 billion in long-term debt. This is an area where the effect of the company’s negative cash flow is more easily seen, since cash has declined consistently since the last quarter of 2017 from a little under $1.5 billion to its current level. Despite the conservative debt/equity ratio number, my conclusion is that the company is highly leveraged, and while the balance sheet shows that operating profits are adequate to service their debt for now, I think their poor liquidity could complicate things if their operating margins begin to shrink.
  • Dividend: VFC’s annual divided is $2.04 per share, which translates to a yield of 2.85% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value. VFC has a Book Value of $10.53. That translates to a Price/Book value of 6.77, against a historical average Price/Book ratio of 4.48. That means that even with the stock’s 28% decline since August, VFC is overvalued by almost 34%. On that basis, the stock’s fair price is only about $47.17; if you’re looking for a good company at a nice price, you can’t start to say that about VFC until and unless it actually drops to around $38 per share.



Technical Profile

Here’s a look at the stock’s latest technical chart.

 

  • Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s downward trend from its August high to the end of December; it also informs the horizontal Fibonacci retracement lines shown on the right side of the chart. That downward trend should have solid support in the $67 price range, and if it holds, the stock could establish a consolidation range around its current level that could provide a basis for an eventual bullish trend reversal. A break below $67, however would likely push the stock to levels not seen since summer 2017 in the $60 range. The stock’s “fair value” price at $47 is actually lower than the last downward trend low that was reached for the stock in early 2017 at around $49 per share. Ih the short term, the stock would have to rally above $79 per share to mark any kind of sustainable bullish trend reversal.
  • Near-term Keys: Given the strength of the stock’s downward trend, and the overall tone for the last three months in the broad market, any kind of bullish bet on VFC can only be categorized as speculative right now; that includes taking any kind of long-term position to bet the stock could revisit its highs from earlier this year at any point in 2019. The stock’s fundamentals just aren’t strong enough, in my opinion to support any kind of bullish view at those price levels. The strongest probabilities with VFC remain on the bearish side, either by shorting the stock or working with put options. The best signals for initiating any of those kinds of trades will come from a break below the stock’s last pivot low support at around $67.