Friday, December 02, 2011

Try on PVH for Size, Leave Warnaco on the Rack

Demand in emerging markets for prestigious U.S. brands is turning the mundane clothing industry into a fast grower. And that trend is helping PVH (PVH) and Warnaco (WRC) to post strong financial results. But should you invest in either stock?

Thanks largely to exports, the global apparel manufacturing industry is big and growing. In 2011, IBISWorld estimates that sales will total $449 billion, 3% higher than in 2010. And exports account for a whopping 69% of the total.

The clothing manufacturing location varies by price level. Less expensive apparel is made in developing regions of Asia and South America while "designers, large wholesalers and retailers are predominantly located in Europe, the United States and developed Asian countries, such as Hong Kong and Japan," according to IBISWorld.

PVH is benefiting from exports of its Tommy Hilfiger and Calvin Klein brands in international markets. And that explains how its third quarter results exceeded expectations when it reported Thursday after the bell.

Its results were great and the stock is up 3% in after-hours trading. For example, its adjusted EPS of $1.89 beat forecasts by 8 cents; its revenues climbed 6.6% to $1.65 billion compared to the same quarter in 2010 and that figure was $10 million higher than expectations. PVH's best brands were Tommy Hilfiger whose sales rose 17% and Calvin Klein that enjoyed an 11% increase.

Warnaco enjoyed growth in its most recent report -- also benefiting from international demand. Its third quarter sales rose 8% to $645.1 thanks to international sales (up 16%) and so-called direct-to-consumer (up 31%) demand growth. The bad news was that its U.S. sales were down 3%.

And Warnaco's adjusted earnings met analysts' estimates. More specifically, Warnaco earned $1.07 per share -- 2.9% more than in 2010.
So here's what the investment choice between PVH and Warnaco boils down to:
  • PVH: fast growing, thin margins; slightly expensive stock. PVH sales have risen 93% in the past 12 months to $5.6 million while its net income plunged 68% to $251 million -- yielding a thin 4.6% net margin. Its PEG (where a PEG of 1.0 is considered fairly priced) of 1.07 is a bit pricey on a P/E of 16.1 and expected earnings growth of 15% to $5.87 in fiscal year 2013.
  • Warnaco: fast growing, good margins; fairly pricey stock. Warnaco sales have increased 13.7% in the past 12 months to $2.5 billion, while net income has soared 44.5% to $165 million – yielding a decent 6.7% net margin. Its PEG of 1.15 is slightly over-valued on a P/E of 13.5 and expected earnings growth of 11.7% to $4.50 in 2012.
Neither of these stocks is a screaming buy because their valuations on expected earnings growth are not cheap. However, PVH has done a better job of exceeding expectations and its current valuation is relatively low. But PVH has work to do in trimming weak brands and boosting its margins.

If management makes progress on that front, I'd expect the stock to rise -- particularly if it can keep beating expectations. By contrast, Warnaco stock looks like it could hover in a trading range until management can find an EPS growth catalyst.


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