Welcome Back Carter's

Carter's is a major manufacturer of baby and young children's clothing and accessories. Despite Covid-related problems in 2020, the company's past decade showed enormous growth across all major metrics. Per share cash flow, earnings and dividends grew by triple to more than five-fold respectively. Shares outstanding shrunk by over 32% during that span. You'd think that impressive numbers like that would be rewarded with a premium valuation. Instead, this fine retailer's shares now sit on the bargain rack. Ten-year total return reflects just a fraction of the value already created. That sets up CRI's stock for a massive catch-up move higher simply to arbitrage away the discrepancy between true worth and the current quote. What is CRI's fair value? From 2012 through 2021, an average multiple ran about 18.6-times, accompanied since 2013 with a typical yield of around 1.28%. As of July 25, 2022 CRI was offered for just 8.9-times management's current year EPS guidance while yielding a juicy 3.81%. That single-digit price-to-earnings is the lowest since the 2008-2009 financial crisis. Shareholders have never been paid more for holding the shares while awaiting the stock's next inevitable upturn. A rebound to a still below normal 16-times multiple on the company's expected 2023 EPS of $9.50 could easily send CRI to a new all-time high of around $152 within 18 months. That implies a total return possibility of almost 99% by January of 2024. My goal is not far-fetched. CRI peaked between $105 and $129 during each of the eight calendar years from 2015 through 2022 year-to-date. Those highs were carved out when major business metrics were nowhere near as good as they are today. The graphic below shows how far things have improved from pre-Covid levels. Management looks for this year's EPS to be up from 12% to 14% from 2021's final tally. Two director purchases, in May and June of this year, showed confidence in CRI's future. There have been no insider sales since. Most analysts are positive on Carter's prospects, although some seem woefully conservative in their target prices compared with the stock's own historical valuation metrics. Yahoo Finance sees about 24.3% in total return for CRI by this time next summer. That would be quite acceptable to most investors. It appears way too modest for me, though, as it assumes CRI will just command about 10.4-times its 2023 EPS estimate, far from its typical level. GuruFocus.com calls Carter's present day fair value as $106.30, around 12-times its current year EPS estimate. Using that same multiple GuruFocus projects a move to $111.48 by Dec. 31, 2023. Once again, I feel that those goal prices are on the conservative side. Even so, few people would be unhappy to gains like the ones implied. Independent research house Morningstar also low-balls Carter's prospects, while still acknowledging its appeal. It calls today's fair value as $92.29 on all-time best EPS, even as it shows it could have been sold for much higher prices than that each year since 2015, including 2022, year-to-date. FastGraphs is more in line with my own views on CRI. They see the stock's normalized P/E as 17.84-times. Its year end 2022 and 2023 target prices shown only assume a rebound to 15-times. Pocketing 69% in six months or 81.3% over 18-months would be quite fine by me. Whomever you think will be more correct, there is clearly significant upside and minimal risk of loss for those picking up CRI shares around $79. Put writers can lock in excellent premiums via sales of March 17, 2023 expiration date naked puts on strikes running from $80 to $95. With CRI at $79.42, worst-case, forced purchase prices ran from $69.40 to $75.70 depending on the strike prices employed. I was able to snag as high as $15.70 per share from shorting March 2023 $90 puts on Monday, giving me a break-even price of $74.30. Carter's is a left to right proven growth vehicle at a decidedly inexpensive valuation. I expect the combination of higher profits and an expanding multiple to deliver outsized gains over the coming six to 18 months. Buy some CRI shares, sell some CRI puts or consider doing both.

Welcome Back Carter's

This maker of baby and kids clothing is an outstanding company, now at a bargain price.

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