Lululemon Athletica: Extremely Overvalued Even In The Most Optimistic Scenarios

May. 9.12 | About: Lululemon Athletica (LULU)

I am not here to rain on Lululemon Athletica's (NASDAQ:LULU) parade as the stock's run has been nothing short of impressive over the past year, but at this point the valuation look very extended, even in the most optimistic scenarios. All of the valuation metrics suggest that the stock is overvalued and even taking growth into consideration at current rates doesn't do much to change the investing outcome of the stock. To add to the bear case, the margins are contracting and the growth is slowing, not a good sign for a growth stock. Below is an in depth look at the valuation metrics and stock chart.

Valuation: Lululemon Athletica's trailing 5 year valuation metrics suggest that the stock is overvalued as all of the metrics are above their respective 5 year averages. Lululemon Athletica's current P/B ratio is 18.5 and it has averaged 6.9 over the past 5 years with a high of 20.5 and low of 1.1. Lululemon Athletica's current P/S ratio is 11.1 and it has averaged 3 over the past 5 years with a high of 8 and low of 0.5. Lululemon Athletica's current P/E ratio is 59 and it has averaged 27.8 over the past 5 years with a high of 57.7 and low of 6.2.

Price Target: The consensus price target for the analysts who follow Lululemon Athletica is $80. That is upside of 6% from today's stock price of $74.93 and suggests that the stock is overvalued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.

Forward Valuation: Lululemon Athletica is currently trading at about $75 a share with analysts expecting EPS of $2.08 next year, an earnings increase of 28% y/y, for a forward P/E ratio of 36. Taking a look at the company's publicly traded comparisons will give us a better idea of the stock's relative valuation. Express (NYSE:EXPR) is currently trading at about $23 a share with analysts expecting EPS of $2.16 next year, an earnings increase of 11% y/y, for a forward P/E ratio of 10.7. Limited Brands (LTD) is currently trading at about $49 a share with analysts expecting EPS of $3.19 next year, an earnings increase of 12% y/y, for a forward P/E ratio of 15.3. Urban Outfitters (NASDAQ:URBN) is currently trading at about $28 a share with analysts expecting EPS of $1.81 next year, an earnings increase of 24% y/y, for a forward P/E ratio of 15.3. The mean forward P/E of Lululemon Athletica's competitors is 13.7 which suggests that Lululemon Athletica is overvalued relative to its publicly traded competitors.

Earnings Estimates: Lululemon Athletica has beat EPS estimates every time in the past 4 quarters. The company's EPS figures have come in between 2 cents and 3 cents from consensus estimates or about 4.1% to 13% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a wide margin which suggests that the stock may experience upside from earnings surprises.

Price Action: Lululemon Athletica is up 55% over the past year, outperforming the S&P 500, which is up 3.5%. Looking at the technicals, the stock is currently above its 50 day moving average, which sits at $73.48 and above its 200 day moving average, which sits at $59.52.

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