Wednesday, August 31, 2011

Don't Dress Your Portfolio in PVH Shares

You've probably never heard of PVH Corp. (NYSE: PVH) but you've probably heard of some of its brands. The former Phillips Van Heusen -- it changed its name in June 2011 probably because it gets most of its revenues from other brands -- owns Calvin Klein and IZOD and it licenses a slew of other clothing brands. But Tuesday it raised its forecast for sales and profits. Should you should invest in PVH shares?

PVH now believes that it will generate revenues and EPS for 2011 that are higher than Wall Street was expecting at the beginning of the week. Specifically, PVH expects revenues between $5.78 billion and $5.82 billion -- as much as $80 million more than analysts' $5.74 billion forecast. Moreover, PVH's 2011 EPS are now forecast to range from $5.00 to $5.12, as much as 14 cents more than Wall Street's forecast of $4.98.

That sounds good -- but is it enough to warrant an investment in PVH stock? Here's one reason why it might:
  • Strong earnings reports. PVH has been able beat analysts’ expectations consistently and in all of its past five earnings reports. In its most recent quarter, PVH's $1.07 beat expectations by 12.63%.
Three reasons to hesitate:
  • Expensive stock. PVH’s price-to-earnings-to-growth ratio of 2.24 (where a PEG of 1.0 is considered fairly priced) means its stock price is expensive. It currently has a P/E of 30 and its earnings per share are expected to grow 13.4% to $5.68 in FY 2013.
  • Increasing sales -- but declining profits and more debt-laden balance sheet. PVH has been increasing sales but profits have fallen. Its revenue has grown at a 21.7% annual rate from $2.1 billion (2007) to $4.6 billion (2011) while its net income has declined at a 23.2% annual rate from $155 million (2007) to $54 million (2011) — yielding a tiny 1% net profit margin. Its debt has risen far faster than its cash. Specifically, its debt rose at a 56.5% annual rate from has $400 million (2007) to $2.4 billion (2011) while its cash increased at an annual rate of 8.1% from $366 million (2007) to $499 million (2011).
  • Under-earning its cost of capital -- but improving. PVH is earning less than its cost of capital – but it’s improving. How so? It’s producing EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, PVH's EVA momentum was 13%, based on first six months' annualized 2010 revenue of $3.4 billion, and EVA that rose from first six months' annualized 2010's negative $817 million to first six months' annualized 2011's negative $379 million, using a 12% weighted average cost of capital.
To get my investment nod, PVH would need to strengthen its balance sheet, tighten its costs, out-earn its cost of capital, and accelerate earnings growth. Changing its name does not help it deal with any of these challenges. But it does make me question whether management thinks it can pull off a fast one on shareholders.


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