It's Time to Play Some Polo with Ralph Lauren, So Saddle Up

Some stocks can be bought and held forever. Others need to be traded. Count the shares of good-quality apparel maker Ralph Lauren Corp. in that second group. The iconic designer/manufacturer/retailer generated more than $6 billion in worldwide sales each year from 2011 through 2019. It sports an A+ balance sheet with no net debt (read: corporate cash exceeds total debt). Ralph Lauren has no defined pension plan to worry about and no preferred shares, either. Those attributes ensure Ralph Lauren can survive the disruption from coronavirus-related closures and prosper again over the coming years. Ralph Lauren suffered two previous sharp pullbacks since it peaked in June 2007. Both ultimately proved to be great buying opportunities. A decline of greater than 69% in RL ended in March 2009 just as the broad market bottomed. Intrepid buyers at that nadir saw a gain of almost 478% over the following three years. A later selloff, from May 2013 through April 2017, took RL down almost 66%. Those who bought that bottom, instead of selling in disgust, were rewarded with a gain of more than 123% in just 15 months. Ralph Lauren's early April 2020 low was almost 60% under its 2018 high point. We can't know yet if that will be the ultimate bottom for this cycle. My guess is that we're awfully close if not there already. As of April 5, RL sat at $61 even. What is RL really worth? From 2010 through 2019 RL shares averaged a price-to-earnings (P/E) multiple of about 18.2x earnings while averaging 1.37% in current yield. At $61 per share Ralph Lauren's P/E is just 9.4x an already-reduced earnings estimate for the fiscal year that ends April 3, 2021, accompanied by a 4% yield. To be conservative I'm assuming quarterly dividends will be trimmed from $0.69 to $0.50 in showing a forward yield of 3.28%. That cut might not materialize. Ralph Lauren's management never reduced dividends previously even when earnings dipped temporarily. Even that lower rate would provide historically generous income, particularly so with the Federal Reserve back to a zero interest rate policy (ZIRP). A modest valuation rebound, to 17x forward estimates, could easily justify a 12-month target north of $124. That goal is not far-fetched. RL gave traders the chance to sell at $105 to $192 during each of the past 11 years, including 2020 year to date with a high near $127. Yahoo Finance agrees. Its profit projections are higher than my own for both the just-completed and current fiscal years. Yahoo sees RL bouncing back to more than $109 by this time next spring. Independent research house Morningstar is even more bullish than me or Yahoo Finance. It calls RL a 5-star, out of 5, best buy. Morningstar does not provide year-ahead targets but does indicate what it sees as present-day fair values for each stock it covers. For Ralph Lauren that figure sits at $121, almost double its April 3 closing quote. Long-term prospect appear bright. Value Line's analyst sees Ralph Lauren's earnings per share rising to $10 not later than 2024, supporting a two- to four-year price range of $135 to $205. There's no reason to believe that won't take place. In summary, Ralph Lauren is a top-quality company at a rock-bottom valuation. Buyers today are paying less than the stock's lows from late 2009 right through March 2020. RL's current yield will be more than double its typical level even if it is trimmed a bit. Downside risk has been mostly squeezed out already. Investors with one- to three-year time horizons have a good shot at doubling to tripling their money.

It's Time to Play Some Polo with Ralph Lauren, So Saddle Up

The shares of the iconic fashion designer are at valuation levels not seen in more than a decade.

Columnist Conversation

Fibocall: WORK -- Buy, Sell or Hold?

Fibocall: Key Support Levels to Know

Monday Morning Fibocall for 7/6/2020

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.