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Ryan Hodges
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I've been an active swing trader since July 2004. I focus on identifying and getting long undervalued or little known prospective momentum plays and on going short when hype and exuberance has caused an equity to far exceed a 'rational' valuation by traditional metrics. I graduated magna cum... More
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  • Calling For LULU To Reach $100 Just Isn't Logical 6 comments
    Mar 26, 2012 9:43 PM | about stocks: LULU
    Lululemon closed out the 2011 trading year at $46.66. Today (March 26, 2012) LULU's final print was $75.23. So in just 57 trading days, Lululemon stock has appreciated $28.57 or 61.23% which equates to $4.1 billion of added market value. Yes, in less than three months $4.1 BILLION has been added to the market value of Lululemon, a company that has only generated $1.00 billion in sales over the last TWELVE months. It just isn't logical.

    Apparently a 61.23% gain in Q1 isn't enough, as many houses are raising LULU's price target. On Friday, for example, RBC Capital upped its price target to $83 from $70. But some investors are looking for even more! Seeking Alpha contributor David Jacoby is calling for $100 a share within 12 months.

    Personally, I think things have already gotten out of hand with LULU shares, but $100? It just isn't logical. I'm going to use Nike to demonstrate why:

    Per his artcile, David is calling for LULU $100 in 12 months on $1.40 billion in revenue. Keeping current shares outstanding of 143.56 million constant, LULU's implied market cap would be $14.36 billion.

    NKE meanwhile is expected to generate sales of $24.14 billion per the 20 analysts aggregated by Yahoo! and to keep the market cap 'comp' true I'll use current shares outstanding of 457.50 million against the $120.13 mean 12 month price target per the 16 brokers via Yahoo! to get an implied future market cap of $54.96 billion for Nike.

    Now, I pose the question, on what planet would it be even remotely rational to ascribe a $14.36 billion market cap to LULU, a company generating only $1.4 billion in sales when at the same time the market would 'only' value NKE at $54.96 billion while recording $24.14 billion in sales? So LULU would enjoy over 1/4th the market cap of NKE despite only recording 1/17th the sales? It just isn't logical.

    The answer is on NO planet would it be rational to value LULU at $100 a share 12 months from now... but the very sad truth is we'll probably see it right here, on Earth... because fundamentals, valuation, etc... nothing matters any more. It seems as though anyone buying LULU today is doing so only because they HOPE to find a greater fool to sell their shares to down the road for more than they paid today.

    So seriously, what rationale could possibly be used to justify an investment at current multiples? Nothing. The bulls can cite astronomical expected growth rates all they want - but I say double those expected growth rates, extend them over an even longer time horizon and the shares are still overvalued right now. There's simply too much exuberance in stocks like LULU (CMG, AMZN, CRM, etc.) these days. Why the market prices in 20 years of 25% growth (which is impossible) from day one instead of bidding the shares up over time as earnings grow is just beyond my understanding. Further, when LULU reports earnings each quarter the stock typically continues to rise. A blow-out quarter should be the mechanism by which these overvalued momentum stocks partly grow into their already outrageous valuations but instead the market bids the shares up another 8-10% making them even more overvalued than before! It just isn't logical.

    While I'd love to get short LULU, I won't. Not while irrationality is driving this bus. But that said, I could NEVER justify buying here, even though Mr. Jacoby is most likely going to be proven right in his $100 call - logical or not. So I'll miss that 33% move in LULU over the next 12 months, but at least I won't be worried that every down-tick is the beginning of the desperately needed and fundamentally justified 60% correction that Lululemon's shares should eventually see.

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

    Themes: overvalued, momentum, irrational exuberance Stocks: LULU
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  •  
    Nike isnt seeing 30%+ (more like 50%) YOY growth Lulu is, and isnt as small as Lulu is, and so it isnt a good comparison. C Day the CEO was intrinsic in the rapid growth of Starbucks in the 90's, so you can see how fast a stock can rise with good accelerated growth. PE is not a good measure for unmatured companies. Of course the PE is going to be high as stock price is a future reflection, sentiment of the company. Saying that, I do not think that Lulu has come close to peaking its growth, so we shouldnt see a huge fall back on the stock price, barring a double dip recession (as told by the ECRI, which I completely doubt!).
    27 Mar 2012, 10:39 AM Reply Like
  •  
    Bohsie, I agree that PE is not a good measure for 'unmatured companies' which is why I didn't look at LULU or NKE growth rates or P/Es but instead compared market caps and revenues.

    No matter how you slice it it's absolutely ludicrous that LULU would have a market cap equal to 1/4s of NKE were LULU to hit $100 in 12 months. And while I can apprciate rapid growth, LULU isn't SBUX... it sells yoga apparel.

    My point is, LULU NEEDS to grow 50% yoy for the next 3-4 years while the stock doesn't budge (which we both know won't happen) for the valuation to drop back to earth. Astronomical growth is already baked into the cake... so a 33% advance from $75 to $100 wouldn't be logical given the expectations already priced into the stock.
    27 Mar 2012, 02:03 PM Reply Like
  •  
    Actually Lulu only needs to grow 50% for two years (2011 - $1.25 per sh, 2012 - @ $2.50 per sh, 2013 - $5.00 per sh.) and with a $140 a share price, their PE would be $28, comparable to Nike's current PE. So your point is wrong. And Lulu has actually been seeing 50% or more growth YOY. They have 140 stores in the US and plan to jump that to 350. Lulu isnt Starbucks, but Christine Day is the CEO of Lulu and was the one at Starbucks that brought their rapdi growth to fruition in the 90's so very much comparable. As for Yoga gear, they sell yoga inspired gear. The majority of gear that women purchase are not yoga specific gear. You go to any mall in Canada, and you will see numerous woman, young girl teens, etc.. wearing the omega on a hoodie, jacket, or pants.

    Also here is a good reverse example of putting too much into a PE. If you were to look at RIM they have a PE of ~3. That is an amazingly low healthy PE, and undervalued. However I would not touch RIM stocks, as their outlook is grim. There PE is a reflection of the forward looking expectations of RIM losing market share to Apple, and to Android. I would not think it's going to POP! And so honestly, until Lulu slows growth down considerably, I would not think it extremely over valued, as you need to look at its future expectations. With less than half the stores in operation for full US saturation, and hardly any international presence, as well as an new dance inspired store, iVivva targeted at young teen girls (doing quite well in Canada), this company has the potential to grow 50% for 3 - 4 years. and that would mean a PE of 7 (for a $140 a share stock price).
    28 Mar 2012, 10:19 AM Reply Like
  •  
    Hey Bohsie, see 'LE's' comment below... you grew earnings by 100% yoy for 2 years to get to EPS $5
    28 Mar 2012, 02:30 PM Reply Like
  •  
    Umm, 50% growth does not mean EPS doubles each year...

    1.25 => 2.50 => 5.00 ??

    try 1.25 => 1.88 => 2.81

    140 / 2.81 = PE 50
    28 Mar 2012, 12:54 PM Reply Like
  •  
    Yes, my bad, I realized that after I had posted it, that I had split the growth there. However, what my original point is that even over 4 years, at 50% growth (which I think is extremely conservative when expanding your store base from 140 stores to 350; Lulu would theoretically see over 100% growth in earnings in jumping to 350 stores alone, not including any International growth), and a stock price of 140 a share, the PE would be well into the 20s. Anything above that 50% growth which I would expect once the store growth really takes off. That said, until growth slows down, the future outlook of Lulu will be positive and will keep the stock price up. Of course you will have your drops like this last week, due more to the market, but there hasn't been a huge sell off, even right now with the drop in the stock market this week.
    29 Mar 2012, 01:17 PM Reply Like
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