In today's Oxen Group recap, we will be looking at PVH Corp (NYSE:PVH) in our daily deeper look as well as recent developments at Organovo (NYSEMKT:ONVO) after the company's move higher again today. The Oxen Group covers PVH year round, and we want to update our current pricing to reflect recent occurrences. Additionally, as always, we will do our typical market overview, important news breakdown, and give our perspective on what's moving the market.
The markets dipped on Tuesday after a hit due to renewed fear over potential taper heading into the all-important Janet Yellen testimony in front of the Senate Banking Committee on Thursday. Early comments from Dallas Fed President Fisher and Atlanta Fed President Lockhart made reference to a December start to taper, while Minneapolis Fed President Kocherlakota said that taper was not necessary yet. The disagreement among Fed officials makes for a tough read for traders/investors. Thus, the Dow, Nasdaq, and S&P all dipped on the day.
PVH is a very solid looking name right now in the apparel manufacturing industry with 50% potential upside over the next twelve months. We have adjusted our price target to $198 for the stock from a previous estimate of $117. The main reasons that we like PVH moving forward is that the company has solid catalysts in margin expansion, growth, and decent value when looking forward. We will breakdown the company in this deeper analysis of PVH.
Right now, the apparel manufacturing industry is very solid with a lot of positive catalysts as growth in emerging markets pushes consumers into nicer clothing as well as the emergence of online shopping makes it easier than ever for companies to acquire shoppers. Further, with economies of scale, the digital revolution allows these companies to operate at higher margins. Additionally, the move from wholesale to direct-to-consumer continues to be key to apparel manufacturing. The reason for this is that the margins are thought to be better and the presence of online shopping makes it easy for manufacturers to market directly without a lot of investment in infrastructure. Still, PVH especially, sees the macro environment as volatile overall with inconsistency.
Right now, PVH has a combination of major catalysts that we believe will provide more upside - the acquisition of Warnaco, margin expansion, and developments in new markets.
One year ago, PVH bought up Warnaco for $2.9B to help bring all of the Calvin Klein brands under one umbrella. Warnaco operated underwear and jeans. The move has left a short-term dent in earnings but the company has great upside in the Latin American markets where it already seeing success. In the latest quarter, the company noted that CK was doing great in Brazil (up 10% year/year). Underwear has been very strong in all markets while jeans have had some struggles and caused a drawdown on margins overall. Yet, over time, the company believes that the deal will allow them to save $100M per year, greatly increasing margins. 2015, to us, looks like the year for the deal to be completely integrated and for upside in earnings and margins to really start to come into affect.
Outside of the Warnaco deal helping margins, we also see the company making solid moves to improve margins in other respects. The company, recently, sold its GH & Bass line to G-III (NASDAQ:GIII), which was a good move for GIII. It was also a good deal for PVH, as they want to focus on the core Heritage brands that can allow them to see margin expansion without incurring heavy costs as they work the Warnaco deal off the books. Additionally, the short-term effects of moving from licensing to direct-to-consumer have a negative effect on margins. The company, though, wants to move away from licensing to get more premium pricing as well as move away from dealing with third party stores, especially small ones. Further, as they introduce themselves into new markets, direct-to-consumer allows the company to be more profitable in the long run, while taking some short-term hits. The company has modeled 11.8% operating margin for 2013FY, which is a drop from 2012. Yet, we could see that easily moving to 13%-14% by 2015 as the company pulls Heritage brands up, sees less promotional costs in Europe and Asia, and ties up costs with Warnaco.
Finally, we believe that PVH has solid potential from its movement into new markets. The company, as we discussed, went after Warnaco to improve its direct-to-consumer potential as well as get better access to Latin America. The company wants to get less dependence on Europe, which has been a major drag. They have made moves into Oceania over the past couple months with new deals in Australia, New Zealand, and the Philippines. With a deal with Gazal, the company will be able to operate jeans and underwear under one umbrella in this area in the beginning of 2014. The company also is working with another licensing company in the Philippines to sell IZOD and Van Heusen brands through 2018. These areas of business have better growth, and we believe that the company can continue to see 5-10% revenue growth per year for several years as they move into new markets, grow in current markets, and expand margins.
So, how do we price PVH moving forward? The company is expecting around 11.8% operating margin along with $8.25B in revenue, putting operating income at around $950M - $975M. If we use that as our starting spot, we can discern how much shares are worth. Let's use the following data:
Revenue - We expect revenue to grow at 5-7% per year through 2017. The company has, historically, grown by 10% or more for nearly every year except the Recession era. Using these lower levels reflects a rougher patch in Europe and North America, but it is a conservative estimate.
Operating margins - We will maintain a 12% margin for each year as the company expects this to rise. Using this lower margin allows us to be conservative in our pricing to find true opportunities.
Capex - We expect this to continue to rise as the company likely expands share buybacks, continues to expand direct-to-consumer offerings, and buys more physical assets. Though, the company has noted they are not acquiring for some time.
When we use this pricing, we come up with a $198 price tag for the stock. That price makes sense to us, as the company is cheap when comparing to 2014 FY potential. The future PE, for us, sits at around 16, which has some upside. Further, the company is growing at a better rate than others in its industry, and therefore, it should get a better valuation. Price/sales is only 1.5, which shows upside.
Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.
Available Cash Flow
Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for PVH: 6.48%
PV Factor of WACC
PV of Available Cash Flow
For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for PVH: 3.5%
Available Cash Flow
Divided by Cap Rate
Multiply by 20167PV Factor
PV of Residual Value
Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:
Sum of Available Cash Flows
PV of Residual Value
Interest Bearing Debt
Divide equity value by shares outstanding:
Today, in our company news section, we want to look at Organovo Holdings. The company has jumped 53% over the past month, 250% YTD, and 25% in the past week. The question is what is going on and is there more upside. ONVO has been rising on the back of confirmation from CEO Keith Murphy that the company remains on track to release its liver toxicity assay test next year. The company is very intriguing with 3D bioprinting business plan that will allow the company to reproduce 3D tissue to help with medical research and therapy applications. The product for liver toxicity assay testing will allow medical research to use livers that will replicate real human livers for various tests.
The company, though, makes no money right now in revenue or earnings, and they are not going to until 2014. Investors of this company know that, so it's really not a point that needs to be discussed. What is important is how much that revenue could be and what is the market for this product, and whether the recent jump in price overvalues or undervalues the product. Yet, the results for their products do remain intriguing and worth noting.
The company wants to have two main sources of revenue with research deals where the company can make $10M - $30M per project and around $500M for its 3D cells being on the market. Yet, the amount of money the company can make is a guess right now. The stock is purely speculative. The idea behind the product is very enticing, and they company looks interesting as a buyout candidate. There is really no way to value ONVO at this time. The recent surge in price seems justified. If the company were able to make $50M in 2014 (a decent estimate given the launch of their test system and likelihood of new research deals), the company's price/sales would be 10x. Estimates are that they can make $500M - $600M by 2018, which puts their price/sales at only 1x. Profit taking makes sense at these levels for traders, but for investors that believe in this company, a lot more potential upside could be had.
Market Chart Overview
The S&P 500 (NYSEARCA:SPY) is having trouble with the 1770-1780 area at the top of this channel. It is following this channel higher, and the stock has to cleanly break 1780 to see further upside from here. Support is at 1750.
The Dow Jones (NYSEARCA:DIA) has gone from worst to best of the indices with strength breaking the 15600 level and strong support at the 15500 and 15250.The index is in a strong upward channel with current resistance sitting at 15800.
There was no economic data for the market to digest today nor is there any tomorrow. The data does not get started until Wednesday, but it is a very light week for the market overall as far as data is concerned.
Asia - Asian markets were mixed with strong gains in Japan and Shanghai while Hong Kong slipped. Japan was up on a weaker yen as it fell to its lowest level in seven weeks. Outside of the currency, the move was surprising due to a drop in Consumer Confidence from 45.4 to 41.2 in October. Asian nations were closed before the Third Plenum announcement, and that anticipation appeared to spook the financial side of China in Hong Kong but leave the materials and retail companies looking solid on Shanghai markets.
Europe - European stocks were dropping on Tuesday after some weakness in banking and commodity divisions. The UK saw the biggest rise in home prices since 2002 as well as a lower rise in its CPI and PPI index than was expected. Yet, banking stocks were dropping as well as materials. Some weakness in the USA from potential Fed taper also was not helping, and there was no catalyst for upside in the region.
The Fed has a big week with Janet Yellen's testimony on Thursday as it should be the biggest market moment of the week, but before then, we got two very different speeches from Kocherlakota and Fisher today as we discussed before, setting the stage for a major showdown on Thursday.
The market should see most of its action coming from the Thursday's Yellen testimony, but we do get some interesting data tomorrow as well as interesting earnings. On the data front, the market will likely be reacting to Export/Import prices as they play a role in taper/QE. Earnings on Wednesday morning from Macy's (NYSE:M) and Progressive (NYSE:PGR) are the only highlights. Should be another quiet day with little overall movement.