Where Will Ralph Lauren Bottom?

| About: Polo Ralph (RL)


10-year fundamentals are sound despite operating margins which have sunk to a multi-year low.

The company's top line is similar to levels in 2013 when the stock was trading at more than twice the current share price.

Eventually elevated investment will fall off. Furthermore I expect the dollar to weaken which will boost international sales.

We have lost over 110 handles in two trading sessions in the S&P 500 (NYSEARCA:SPY) and I believe there is more pain to come. Ralph Lauren (NYSE:RL) has fallen off a cliff since it reached its dizzy heights of $180-plus a share back in 2013 and 2014 and it looks probable now that the share price could easily drop to its February lows of around $83 a share in the next few trading sessions. Would this present opportunity or would an investment in Ralph Lauren be too much of a risk? I actually think it would be the former despite operating margins being at their lowest for more than decade. I do think this company will get its house in order eventually as its fundamentals back it up. Furthermore when evaluating a potential value play, I always look at the fundamentals over a 10-year period to get a feel for the most important metrics.

Years Of Dividend Increases 7 Years - Pass
Free Cash Flow $589 million (10-Year Trend Is Flat) - Pass (Very Important For Dividend Investors - Dividend Currently Is 2.29%)
Revenues $7.4 billion (10-Year Trend Is Up) - Pass
Operating Margins 7.9% - (10-Year Trend Is Down) - Fail
Price History of the stock Up 60% in the last 10 years excluding dividends - Pass
Healthy balance sheet Total assets = $6.21 billion (10-Year Trend Is Up) - Pass
Competitive Advantage
  • Customer Relationships
  • Brand Strength - Pass
Resistant to recessions? EPS actually rose during the recession of 2008 - Pass
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As we can see, when we do our due diligence over 10 years, we can see that operating margins (which consequently affect earnings) is the one metric that's keeping investors away and with good reason. Earnings per share have dropped from $8.43 in 2014 to a current trailing 12-month average of $4.62. Nevertheless although I usually run from perceived "value plays" when I see negative earnings, I can live with negative earnings growth as long as it has been temporary and as long as I can see a turnaround with this particular metric.. Let's take a look at some valuation metrics to see if they look attractive..

Price To Earnings Ratio 19.4
Price To Cash Flow 7.6
Price To Sales 1.0
Price To Book 2.0
Debt To Equity Ratio 0.23
Current Ratio 2.55
Quick Ratio 1.39
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These numbers are impressive, especially the earnings and sales multiples which are much less than the industry's average and the company's five- and 10-year averages. So basically we have a company which had its share price cut in half but still has positive earnings, a growing dividend and higher revenues now than when it traded for north of $180 a share a few short years ago.

So is this stock a buy? That's the million-dollar question. I have seen many "seemingly" undervalued stocks stay undervalued for a long time. I've been there when you are long with what you think is an undervalued stock with solid fundamentals only to see an fair valued or even overvalued stock outperform your pick for quarters on end. However here are some reasons why this stock should be on your radar and why an inflection point may be fast approaching.

  • This company has ample runway to grow its brand overseas (which it is concentrating on). In fact, sales are growing faster presently overseas as the company puts its focus on rolling out its retail presence especially in Asia and China. I think a lot of this good stuff is going to come at precisely the same time as a bear market in the US dollar. The dollar managed to tag its 200 daily moving average as a result of the Brexit vote but I see the greenback topping here and starting its long awaited bear market. This will have ramifications for many US multinationals with foreign income as when a company can ship home foreign currency (which due to dollar weakness is more valuable in US dollars), earnings automatically get a hike. I live in Europe. The brand is definitely a premium brand here so I'm sure sales will gain traction once the company's retail presence is expanded. Furthermore the sizable drop in the share price recently has more to do with dollar strength than anything else. The dollar will turn over which in turn over time will be a nice tailwind for Ralph Lauren stock.
  • Now onto the dreaded operating margins. The company estimates that it will record operating margins of about 9 to 10% this year which although will be a multi-year low should be temporary if all goes to plan. De-leveraging and spending on new initiatives such as brand equity and marketing will bring operating margins back to around the 15% level by 2020 according to the company. However, the transitions and cuts (stores and management) don't seem to be anywhere near finished which is why investors are still shying away from this stock. Projected earnings per share next year of $5.88 is still much lower than last year's printed number of $6.36. We will wait until we see an uptick in projections as otherwise scaling into the stock could be catching a filling knife.

I'm going to be adding a few good dividend and growth stocks to the Elevation Portfolio over the next several weeks when I see value. In order to ensure that income is brought in every month, it's imperative that they are not correlated and all don't have similar valuations. You can follow along by pressing the "Follow" button above.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.