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Summary

  • The entire apparel industry is in turmoil; this could be a “buy when there’s blood in the streets” opportunity.
  • One particular apparel company generates high levels of free cash and is still the cheapest stock in the industry.
  • This same company fell close to 10% on a weaker than expected earnings report.

Apparel stores have been hit and miss over the last few years. The teen retailers have been hit quite hard, including Aeropostale and American Eagle, which are down 60% and 30% over the last six months, respectively.

Teen retailers are not the only ones feeling the pressure. Many top apparel makers have been slammed due to the rise in unemployment and fickle nature of shoppers. However, assuming management is competent, turning around an apparel retailer can be done. The biggest part is to get rid of unpopular inventory.

Express (NYSE:EXPR) is very cheap. Shares are 44% off their 52-week high. The stock trades at the lowest P/E ratio in the apparel retail industry, coming in at just under 10 times earnings. Its P/E to growth ratio is a mere 0.5.

Express is down 36% over the last twelve months, compared to Dow Jones U.S. Retail Index that's up 10% over the same time period. Shares tumbled another 12% in one day, after releasing earnings, where the company missed fiscal 1Q EPS and revenue expectations.

However, it is generating nearly $1 a share in free cash flow. Based on its current trading price, its free cash flow yield is over 7%. Compare that to the industry's largest company, Luxottica Group, which has a free cash flow yield of 3.1%.

Express has one of the highest returns on invested capital around, coming in at 20%. It has been a public company for less than five years. In that time, it has traded at an average P/E ratio of 12. It will not take much to see impressive upside from the shares.

The problem is the entire industry is being slammed. The rebound in consumer spending is taking longer than expected. Even still, analysts are still quite positive on the Express. There is 19 analysts following the stock, none with a sell rating and the average price target is 10% higher than Express' current stock price.

Assuming that Express should at least be trading in line with its historical P/E ratio come fiscal 2016 (ends January), when it is expected to generate $1.33 a share in earnings, the upside is to $16 a share.

Source: This Might Be The Cheapest Investment In Apparel