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NYSE:VFC - April 29, 2009 close: $58.12

52-week range: $38.22 (Nov. 20, 2008) - $84.60 (Sep. 4, 2008)
Dividend = $0.59 quarterly = 4.06% current yield


V.F. Corp (NYSE:VFC) is the world’s largest publicly held clothing manufacturer. Major brands include Lee Jeans, 7 For All Mankind, The North Face, Wrangler, Nautica, Jansport, Vans, John Varvatos and Napapirji. They hold about a 20% share of the entire US jeans market. International revenues are about 28% of sales.

VFC has been a very good performer long term. From the last US recessionary period EPS grew from $2.68 in 2001 to $5.42 in 2008 with each intervening year showing a year-over-year increase.

The dividend has been raised in each year as well with the most recent increase taking effect in Q4 2008. At the present annual rate of $2.36/share (and today’s depressed share price of $58.12) the current yield is an outstanding 4.06%. That’s better than CD rates and even the interest available on 10-year Treasuries. It seems quite secure with just a 42% payout ratio.

Value Line gives VFC an ‘A’ for financial strength, and notes their ‘stock price stability’ and ‘price growth persistence’ are in the 90th percentile. ‘Earnings predictability’ is even better at the 100th percentile (with 100th being best).

V.F. Corp got creamed in Thursday’s trading after reporting March quarter earnings of $0.91 versus 2008’s $1.33. Zacks estimates for this year and next have been marked down to $5.37 and $5.93 due to the recession.

Here are the historical per share numbers as reported by Value Line:

Year ….. Sales …... C/F …... EPS ….. Div …...… B/V ….. Avg. P/E

2001 ..…50.17 ……4.28 …. 2.68 ….. 0.94 ……19.19 ….. 13.6x
2002 ..…46.84 ……4.46 …. 3.38 ….. 0.97 ……15.28 ….. 11.8x
2003 ..…48.14 ……4.62 …. 3.61 ….. 1.01 ……18.04 ….. 10.6x
2004 …..54.36 ……5.23 …. 4.21 ….. 1.05 ……22.56 ….. 11.5x
2005 ..…59.05 ……5.59 …. 4.54 ….. 1.10 ……25.50 ….. 12.6x
2006 ..…55.41 ……5.74 …. 4.73 ….. 1.94 ……29.11 ….. 14.1x
2007 ..…65.75 ……6.66 …. 5.38 ….. 2.23 ……32.58 ….. 15.4x
2008 ..…69.40 ……7.32 …. 5.42 ….. 2.33 ……32.37 ….. 12.6x

At Thursday’s close of $58.12 these shares are now offered at 10.8x this year's and 9.8x 2009 and 2010 estimates respectively. That’s a discount that already seems to reflect the poor economic environment.

Here’s how I’m playing this right now knowing that it’s likely we’ll see at least one or two more negatively quarterlies:

______________________... Outlay ……..Cash Inflow
Buy 1000 VFC @$58.12____$58,120
Sell 10 Nov. $55 calls @$8.70___________$8,700

Sell 10 Nov. $55 puts @$6.20__________$6,200

Net Cash Out-of-Pocket____$43,220


If VFC shares merely mark time from now through November 20, 2009 by holding above $55 (where they are even after the latest news release):

Your $55 calls will be exercised.
You will sell your shares for $55,000.
Your $55 puts will expire worthless (a good thing for you as a seller).
You will have collected $1180 in dividends (2 X $590).
You will have no further option obligations.

You will then hold no shares and $56,180 cash for your original outlay of $43,220.

That’s a best-case scenario profit of $12,960 achieved over just 6.5 months.
$12,960/$43,220 = plus 29.9% cash-on-cash.

This would be your result if VFC shares:
• Go up.
• Stay unchanged.
• Go down to $55 (-5.36% from our starting price).

What if VFC goes below $55 on expiration date?

Your $55 calls will expire worthless.
Your $55 puts will be exercised.
You will be forced to buy another 1000 shares and to lay out
an additional $55,000 cash.
You will have collected $1180 in dividends.

You would then own 2000 shares of VFC and hold $1180 cash.

What’s the break-even on this whole trade?

On the first 1000 shares it’s the $58.12 purchase price less the
$8.70/share call premium = $49.42 /share.

On the ‘put’ shares it’s the $55 strike price less the $6.20/share
put premium = $48.80 /share.

Your net cost would be the average of:
$49.42 + $48.80 / 2 = $49.11 /share.

Take off the $1.18 /share in dividends received and your net break-even from start to finish is reduced to $47.93 /share.

Thus, VFC shares could drop by as much as $10.19 or (-17.5%) from the starting price of $58.12 without you suffering a loss.

That $47.93 break-even price is lower than the lowest trade price from late 2004 right through September 2008. VFC traded at peak prices of $55.60, $61.60, $83.10 and $96.20 in the years 2004-2005-2006- and 2007. They changed hands as high as $84.60 as recently as last September.

In summary:

You have total return potential of 29.9% over the next 6.5 months if these shares merely stay above $55. You are protected against loss as long as VFC does not decline by more than 17.5% over that same 6.5 months.

If you think the shares already reflect the bad news the risk/reward looks very good here.

Disclosure: Author is long VFC shares and short VFC options.

Source: How I'm Trading V.F. Corporation Given Negative Quarters Likely Ahead