Prior to Friday's opening bell, Tiffany & Co. (TIF) reported strong earnings causing the stock to rise in early trading. I've had my eye on Tiffany since the company's prior earnings report gave me some concern, but with the P/E dropping, I decided to take a look at this company along with the other apparel producers in the S&P 500. Upon further review, it appears PVH Corp. (PVH) is a better target for potential investors getting into this space.
PVH will be reporting its fourth-quarter and full-year earnings Wednesday. Ahead of this report, investors should realize the company has met or beaten expectations for six consecutive quarters and only has one earnings miss in the previous four years.
On a price to earnings basis, PVH is the second-lowest in its peer group. Among the S&P 500 components, it is the cheapest (Fossil, FOSL, has since left the S&P 500). PVH's P/E compared to Tiffany is significantly less. On a forward earnings basis, the trends are similar to trailing P/E. It's important to note that many companies in this sector are struggling with earnings growth. While I recognize this, the lower P/E companies, in my opinion, have more upside in the event of an unexpected earnings beat or upward earnings guidance.
One other metric I use to examine value is the price to book ratio. This helps determine what premium the market is placing on the company's book value. In the case of the same peer group, PVH is priced the lowest. Compared to Tiffany, PVH's price to book ratio is nearly half that of Tiffany's. This analysis also helps determine which companies could have more downside risk if the sector contracts further.
While PVH may appear to be the value steal of the sector, investors should be mindful of the factors that got the stock in that position. For example, the company's return on equity is the lowest of the peer group. This indicates the company is struggling to efficiently produce earnings in a challenging environment. In addition to this, the company has had a significant run-up in the past few weeks, bringing its relative strength index into the 80s.
PVH has its share of operational and sector risks, but the low valuation risks cannot be ignored. Investors who believe a turnaround in the apparel sector is coming or those seeking a situational play may want to take a close look at PVH Corp.