Shares of PVH (NYSE:PVH) soared in late March after the global apparel giant reported fourth quarter numbers that topped expectations across the board. The guide was healthy, too, and came in largely above consensus estimates. Investors reacted positively to the upward surprise. PVH stock rallied 15% in a day.
Source: Mike Mozart via Flickr
This post-earnings rally is an extension of a much larger rally in PVH. Since late 2018, as the global economy has stabilized and even improved in some areas, PVH has rallied nearly 50%. That’s a big rally. But, the stock suffered a big drop in 2018, and even with this early 2019 rally, is still more than 20% off all time highs.
Thus, there’s two ways to look at PVH stock here. Either this is a stock that has come very far, very fast and needs to cool down, or this is a stock that is on a solid recovery trajectory from a deep 2018 sell-off and has more room to run higher.
I think the latter viewpoint holds more water. As such, I believe PVH stock can stay in rally mode for the foreseeable future, and will see prices above $140 within the next several months.
The PVH Recovery Is Underway
PVH stock was killed in 2018 amid slowing growth concerns. Broadly speaking, PVH’s growth rates at both Tommy Hilfiger and Calvin Klein were slowing against the backdrop of a global economy that was likewise slowing. Investors didn’t that like those slowing trends. So, in an attempt to “get out before things got ugly”, they sold, and thestock dropped sharply. By about 50%, to be exact.
But, things never got that ugly. Just look at the fourth quarter numbers. Revenues rose 2%. Sure, that’s slower than 2018’s full-year growth rate of 8%, but it’s still positive. Tommy Hilfiger revenues rose 5%. Calvin Klein revenues were flat, and importantly didn’t go negative.
Meanwhile, revenue growth next year is expected to be roughly 5%, led by high single digit growth at Tommy Hilfiger and low single digit growth at Calvin Klein. Gross margins are still expanding. Opex rates are dropping. Profits are heading higher.
In other words, if I asked you where the ugly was in the PVH report, you’d have a tough time answering the question. Sure, growth is slowing, but it’s still pretty much positive everywhere and is supposed to improve in 2019. This especially makes sense given that global economic consumer confidence has bounced back in early 2019, especially in the U.S.
Overall, then, PVH’s fourth quarter earnings report confirmed that things aren’t all that bad for the global apparel giant. The stock was priced for really bad. Consequently, what we are seeing now is a healthy recovery rally in an overly beaten up stock.
Valuation Leaves Room For Upside
This recovery rally in PVH stock has room for further upside given the stock’s still relatively depressed valuation.
Earnings next year are supposed to come in around $10.35 per share, up 8% year-over-year. PVH stock currently trades around $130. That means the stock is trading at just 12.5-times forward earnings, on a high single digit profit growth profile. That’s too cheap. The entire apparel retail space trades at a far larger forward earnings multiple (17.6) on a largely similar mid to high single digit profit growth profile (5-9%).
Further, PVH historically trades around 15-times forward earnings. Relative to that historical standard, today’s 12.5 forward multiple is pretty cheap.
In other words, PVH stock is still priced for a lot of bad. That gives the stock healthy upside if bad doesn’t happen in 2019, and it shouldn’t given improving global economic fundamentals. To be sure, this company isn’t a big grower, but assuming slightly below average apparel market growth rates and gradual margin expansion over the next several years, PVH could hit roughly $15 in EPS by fiscal 2025.
Based on a historically normal 15 forward multiple, that implies a fiscal 2024 price target for PVH of $225. Discounted back by 10% per year, that equates to a 2019 price target of $140. With PVH stock trading around $130 today, that means this stock still has good upside over the next several months.
Bottom Line on PVH Stock
PVH is proving to the doubters that things aren’t all that bad at the global apparel giant. As such, PVH stock is bouncing back from the dead. This recovery rally has legs, given the stock’s still relatively depressed valuation, and further upside over the next several months look likely, so long as the global economy remains healthy.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
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