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Fashion Forward? Liz Claiborne - LIZ

February 10, 2008 | About:
Liz Claiborne [NYSE:LIZ] Feb. 8, 2008 price: $20.73 yield = 1.1%

52-week range: $16.05 - $46.84

Liz Claiborne designs and markets over 40 labels while outsourcing its manufacturing operations. Key brands include Juicy Couture, Kate Spade, Lucky Jeans, Ellen Tarcy and their flagship, Liz Claiborne.

2007 was a year to forget for this fine company. Earnings declined from an all-time high of $2.99 /share in 2006 to an estimated $1.73 /share for the year just ended. Due to uncertainty about the US economy there are a wide range of estimates floating around for 2008. The lowest forecast is for just $1.40 while the most optimistic one is for a rebound to $2.47. Consensus right now says the current year will see $1.98.

Why then, should LIZ be considered for purchase? Valuation. These shares are down from a high last February of $46.84 and hit over $42 /share at some point in each of the past 4 calendar years. The two previous years LIZ shares peaked at $33.30 and $38.90 - well above today's $20.73 quote.

Value Line rates the company's financial strength an A+ and LIZ gets good marks for stock price stability and earnings predictability as well [at the 80th and 85th percentiles].



Total debt is just 20% of capitalization and there was over $112 MM in treasury cash as of last September. Value Line's assigns LIZ their highest [ #1] safety ranking.

Management is taking steps to fix their problems. 3 underperforming brands are being sold to allow LIZ to focus on more profitable units and to better deploy their capital. Star designer Isaac Mizrahi has been hired as creative director of the Liz Claiborne line.

In nine of the ten years from 1997 - 2006 the net profit margins ran between 6.2% and 7.7%. Even the out year [recessionary 2001] showed a net margin of 5.8%. It seems likely then that longer term LIZ can see a recovery to at least a 6% margin. With projected revenues per share of $42.15 for 2008 that means normalized earnings would exceed $2.50/share. That dosn't appear to be a stretch as EPS were $2.55 - $2.99 in each of the four years 2003 - 2006.

Value Line is assuming a 3 - 5 year projected P/E of 16 but I'm more comfortable with using their 10-year median P/E of 13X. Even that 13 multiple on $2.50 of EPS gets me to a target price of $32.50 or + 56.7% above today's price. If it takes 2 full years to achieve this goal we'd see around 59% total return or 28% annualized [including the 1.1% dividend]. If things go better than expected or the rebound comes quicker, the annualized returns would be higher.

Risk? If the economy falls off a cliff and never recovers then LIZ shares are likely to drop along with most other shares. If this cycle plays out as all past cycles have, then within 12 -24 months we should see decent gains in both sales and earnings with a large share price increase.

Except for the last days of 2007 and early this year, Claiborne shares have not traded as low as right now since 2001 [right after the 9/11 attacks]. Buyers then saw these shares jump back up from their 2001 low of $18 to $42.50 in just 3 years.

A rumor of a sale or spin-off of the hot 'Juicy Couture' line adds a little spice to these otherwise somewhat conservative shares.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.8/5 (12 votes)

Comments

mungerite
Mungerite - 6 years ago
doc what are your feelings on this?
billspetrino
Billspetrino - 4 years ago
Again a perfect example of a value trap

A simple look at the company's balance sheet would have revealed the problems it had

When investing it is very important to AVOID stocks like this

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