California Dreamin': Pacific Sunwear Looks Attractive at its Current Valuation (PSUN)

Fashion retailer Pacific Sunwear (PSUN) is a company we’ll be watching. Currently priced at 11.87 times trailing earnings and 9.77 times forward earnings, the stock looks cheap. It’s also priced just below 1x sales and has an EV/EBITDA ratio of 4.99.

The balance sheet carries no long term debt (although check out lease obligations) and $108 million in cash. There’s no dividend, but the company might be using its cash to fund growth.

With a market cap of $1.37 billion, PSUN has room to grow. Abercrombie & Fitch (ANF) has a market cap of around $5 billion, as does American Eagle (AEOS).

PSUN is a steady long term grower. Sales for the fiscal year ending 1/97 were $155.3 million and grew each year to $1.39 billion for the fiscal year ending 1/06. Over the same period, net income followed a similar trajectory, rising from $7.4 million to $126.2 million. EPS followed in course, growing from $0.12 to $1.67.

Operating margins of 13% trail behind Abercrombie at 19% and American Eagle at 20%, but are ahead of Gap (GPS) at 10.5%. Bulls will argue that PSUN still has an edge in fashion flexibility over other retailers. Morningstar, which gives the stock its highest rating of 5 stars, wrote in a recent report (sub. req.):

In our opinion, the company's success is based on its diversified approach to merchandising, which combines a variety of branded products such as Quiksilver and Hurley with its own private label. We believe this approach gives the company a marketing edge over rivals such as Abercrombie & Fitch and Aeropostale, which only offer products under their own brand names. Unlike these retailers, Pacific Sunwear has more flexibility in dealing with changing trends should one of its brands lose favor with consumers.

If further research leaves us believing that the past growth trend will continue, the stock’s a steal at the current valuation.

PSUN 1-yr chart:

Comments

[FaisalLaljee]

I don't doubt that PSUN is undervalued and has years of earnings growth under its belt. But as is the story with the retail sector, once a retail stock goes out of favor, it stays that way for a while. The stock is at 2 year lows and with increased competitiion from ZUMZ and UARM, I am skeptical about its ability to make a come back.

-- Faisal Laljee