Columbia Sportswear And Crocs: 2 Stock Picks If You Love A Sale
Summary
- Apparel stocks will be set free towards the back-end of 2021.
- Crocs and Columbia are the two top picks because of efficiency and valuation metrics.
- Columbia shows massive EPS upside whilst Crocs is busy smashing earnings.
- The Monte-Carlo simulation shows that investors can't go wrong by picking both.
- Cyclical and cost risks should be monitored.
We're focusing on consumer discretionary again as a conviction play. We looked for higher volatility stocks to fill the appetite of investors who're looking to take on more risk. Our coverage today is in the apparel industry with Columbia Sportswear Company (NASDAQ:COLM) and Crocs, Inc. (NASDAQ:CROX).
Why We're Into Consumer Discretionary and Apparel
Having managed a lower volatility portfolio since February to manage drawdowns we've decided to go more risk-on recently, which included buying stocks such as Central Garden & Pet Company (CENT) & Party City Holdco (PRTY). We've added liquidity to our portfolio and in doing so we've decided to look for the top 2 apparel stocks, which are the ones we're covering today.
Columbia Sportswear
Columbia Sportswear Company engages in the manufacturing, distribution, and marketing of outdoor and active lifestyle apparel. The company is situated in Portland but sells its products globally (We love its products in South Africa).
"The company provides apparel, accessories, and equipment that are used in various activities, such as skiing, snowboarding, hiking, climbing, mountaineering, camping, hunting, fishing, trail running, water sports, yoga, golf, and adventure travel. It also offers footwear products that include lightweight hiking boots, trail running shoes, rugged cold weather boots for activities on snow and ice, sandals and shoes for use in water activities, and function-first fashion footwear and casual shoes for everyday use." - Source
Columbia unlike many apparel brands isn't bound to seasonality. Sure most apparel brands sell clothes for every season but not many sell with conviction. Columbia caters to a broad spectrum.
Performance
The stock has overperformed the index over the past year but has seen abrupt movements in price due to supply issues. In the long run (5y), Columbia has struggled versus the index and underperformed by 33.09%.
The company beat its latest earnings estimates with an EPS beat of $0.45 and a revenue beat of $30.63 million. Analysts expect the company's EPS to climb significantly over the next year and beyond, which signals value to shareholders.
Efficiency
The company has seen a surge in EV/EBITDA, which can be attributed to high earnings versus efficient debt and asset management. The Q-1 earnings release showed an EV/EBITDA of 21.3x, which is in line with December's 25x figure shown in the graph.
The company has a Piotroski score of 5, which is in the 90th percentile of the industry. The score measures the balance sheet liquidity, profitability, and operating efficiency. The company beats 90% of the sector.
Value Drivers
- The company showed strong growth in the past six months with updated views from Wall Street. According to TipRanks the likes of Merrill Lynch, Cowen, and Robert W. Baird have all placed buy ratings on the stock in the past 3 months.
- The income statement shows that gross margin has increased 360 basis points due to operational efficiencies such as reduction of bad debt expenses and general SG&A.
- The company's direct-to-consumer business is a major driver with sales growth of 20% in Q-1. In general Columbia's e-commerce sales have surged by 35% in 2021, which makes up for 20% of the company's sales mix.
- Columbia's brand awareness is growing, and the company is continuously creating synergies, which allows it to scale.
Risks
- Columbia usually has lower sales in Q-2 than in Q-1 historically. Although a rising discretionary trend should see this risk being neutralized.
- The covid recovery isn't fully complete, and many might choose to save and invest instead of buying attire.
- Covid disruption might cause insufficient inventory on hand to meet demand.
- Rising commodity prices might eliminate opportunities for price discounts, and Columbia's products already aren't cheap.
Valuation
We valued the company using the Justified Forward P/E model, written as Stock Price/Estimated EPS. We created a 12-month FWD multiple.
106.98/4.43 = 24.15x
If you look at the forward P/E relative to the industry average of 61.70, the stock is undervalued.
Source - TipRanks
According to TipRanks, Wall Street analysts have a mean price target of $125.86, which aligns closely with Zacks Equity Research's $126.00 price target. It's fair to say the stock holds value.
Crocs
Having come back into fashion during 2020, Crocs are a popular trend among many again.
"Crocs, Inc., together with its subsidiaries, designs, develops, manufactures, markets, and distributes casual lifestyle footwear and accessories for men, women, and children. It offers various footwear products, including sandals, wedges, flips, slides clogs, charms, and shoes under the Crocs brand name." - Source
Crocs serves a smaller market than Columbia and sales volatility will be more abrupt but what works in its favor is price leadership. The company sells quality shoes at fair and affordable prices.
Performance
Apart from having a phenomenal year, Crocs has shown an astronomical return over the past five years, beating the S&P 500 index by nearly 10 fold.
In its latest earnings release, the company crushed estimates with a $45.31 million revenue beat and a $0.60 EPS beat. We had a look at the latest earnings report to assess sustainability.
- The company smashed earnings whilst increasing receivables by 34% and only increasing payables by 21%. This could result in even better revenue results later in 2021. The company's days of sales outstanding are numbered at 34 and much of the earned revenue in Q-1 could reflect in Q-2.
- Deferred taxes include an asset of $334.6 million with no liability. If this had to be exercised along with a higher corporate tax rate (which increases tax assets), reported earnings could benefit significantly.
The bottom line is growing really well for Crocs. With a current WACC (weighted average cost of capital) of 13.16% and a cost of debt of approximately 4%, we see improving bottom-line margins as the recent sales volume should enable the company to obtain more favorable financing terms.
Efficiency
Although not at its highest levels ever, the company had a 21.6x EV/EBITDA multiple in December, which is in the 76th percentile of the sector. It has to be noted that this figure is currently around 18.5x due to an approximate 88% increase in long-term debt. But with an interest coverage ratio of 54.8x, leverage really should be seen as expansionary and not as a concern.
A Piotroski score of 8 leaves the company in the 95% sector percentile, which again means that balance sheet health, operational efficiency, and profitability are top-notch.
Value Drivers
- Phenomenal earnings and efficiency have been the engine in the stock's price. We tend to forget that good earnings make good companies, which make good stocks most of the time.
- Crocs has seen strong e-commerce growth with a 75% increase in online sales during Q-1. We think if the company can increase leverage and sustain sales (higher leverage per unit sold) we may see future performance knocking the ball out the park.
- The company is selling a low-cost, high-quality product on a global scale. This is a key aspect for us in an inflationary environment where we're looking for high cash flows and low COGS (cost of goods sold) stocks to buy.
Risks
- The company competes in a perfectly competitive market structure, and if substitutes arise, its earnings could change for the worse very drastically.
- Increased raw material costs may take away what makes Crocs competitive and that's cost leadership. If the company had to sell its products at higher prices, it probably won't appeal to its current market anymore.
Valuation
Again, we used a Justified Forward P/E model:
106.36/5.72 = 18.59x
Based on the industry P/E of 61.70 we can again conclude that the stock is undervalued and we can follow on to price targets.
Source - TipRanks
Having a look at a sample from TipRanks, institutional analysts price the stock at a mean of $123.75, which is well above the current price.
Looking At The Two Combined
We're going to look at a Monte-Carlo simulation based on a hypothetical $1,000 investment, which predicts portfolio returns for five years. Just note that this is a prediction and it's not to be taken literally. We also don't suggest investing all your capital in two stocks (consult your financial advisor).
Source - Portfolio Visualizer
Source - Portfolio Visualizer
The simulation does take into account volatility, which includes sectorial rotation, systemic risk, idiosyncratic risk, and many other factors. It can be seen that if you invested $1,000 with a $45 annual withdrawal requirement, it's estimated that the portfolio will gain 103% (inflation-adjusted) and 100% of the portfolios will have survived the withdrawal requirement. If you compare this to the annual mean S&P return of 9.84% (although it has exceeded that amount by far in 2020 and 2021 thus far), it's an investment set to outperform.
Source - Portfolio Visualizer
Source - Portfolio Visualizer
By looking back at 1990 to today we can see in our matrix that a buy and hold portfolio would be the ideal solution. This means that you're buying the S&P along with the two assets. By looking at the graph we can see that seasonal changes oscillate around the S&P and apparels recovering from a downtrend in 2020. The reasons why we think this will continue trending upwards are:
- Stimulus and summer holiday spending will further boost apparel companies' earnings.
- There's a rotation out of tech into consumer discretionary at the moment.
- These are two undervalued value stocks, which are en route to reaching their fair values (mentioned earlier).
Final Word
Apparel is a good conviction play right now. Both these stocks are undervalued and are efficient operationally and financially. Key drivers linked to both the industry and idiosyncratic features breathe air into the stock's potential. The Monte-Carlo simulation shows upside. Both these stocks are buys!
This article was written by
Quantitative Fund & Research Firm with a Qualitative Overlay.
Coverage: Global Equities, Fixed Income, ETFs, and REITs.
Methods: Factor Analysis, Fundamental, Valuation, Street Gossip, and Common Sense.
Our work on Seeking Alpha consists of independent research and not financial advice.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CROX, COLM over 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.