By: Frederick L. Harris, III
This week we ran a screen to identify companies that delivered returns on shareholders' equity (a well-regarded measure of company performance) of more than 30% in the past year. To inject a value element into this screen and identify companies that may have strong rebound potential, we then required the companies have a year-to-date total return of 10%. The 26 equities that made the cut are listed below. This group may be a good starting point for investors seeking shares with promising year-ahead performance prospects that also boast a record of consistent corporate performance, at least in terms of profitability. Two companies we will focus on are Michael Kors Holdings Limited (KORS, Financial) and Core Laboratories (CLB, Financial).
Michael Kors Holdings Limited
Michael Kors Holdings Limited engages in the design, marketing, distribution, and retail of branded men’s and women’s apparel and accessories. The company operates in three segments: retail (48% of fiscal 2013 sales), wholesale (48%), and licensing (4%). Products are marketed under two primary brands: Michael Kors luxury collection and MICHAEL Michael Kors accessible luxury collection. As of September 2014, it owned and operated 320 retail stores in North America and 153 international stores, which are located in Europe and Japan. That marked a 34.4% increase from the total number of stores that existed in the same period the previous year. The company also had 176 additional retail stores operated through licensing partners.
Michael Kors has managed to generate healthy earnings thus far in fiscal 2014, which ends the Saturday closest to March 31 of next year. That can be attributed to good performances across all operations (i.e., retail, wholesale, and licensing) and geographic regions. Indeed, the company’s, "fashion leadership, aspirational product offering, and jet-set luxury image continue to resonate with customers globally."
Nonetheless, the stock price has struggled lately. It appears that’s partly because increased promotional expenses (though they are lower than some rivals) and recent moderation in North American comps (versus prior periods) have raised investor concerns about whether Michael Kors’ growth will slow soon. That’s in spite of steady international expansion. To further complicate matters, Sportswear Holdings, the largest shareholder, decided to sell its remaining 6% interest in KORS, while two members (from Sportswear) resigned from the company’s board.
But the market’s unfavorable treatment of these shares might be overblown. While we acknowledge the slower trends, our sense is that KORS will remain in growth mode, at least through mid-to-late decade. Indeed, the brand’s momentum will probably remain strong, though keeping promotions under control to avoid diluting the name will be key. Widening the global footprint where the brand’s popularity is growing (i.e., Europe, Asia, and Latin America) should help offset moderation on the domestic side. KORS also stands to benefit from expansion into other product categories, such as fragrances and eyewear, and growth of the e-commerce channel. Finally, although the aforementioned move by Sportswear typically signals declining confidence in a company, it may not necessarily be the case here. All things considered, the recent stock price might present an opportunity for patient investors, given the solid capital appreciation potential out to 2017-2019, versus the Value Line median.
Core Laboratories
Core Laboratories is a leading oilfield services provider, with 70 offices in more than 50 countries. It operates in three segments: Reservoir Description (49% of 2013 revenue, 44% of operating income), Production Enhancement (42%, 47%), and Reservoir
Management (9%, 9%). Approximately 70% of the company’s revenues are from services, 30% from product sales. Businesses from outside the United States generate about 50% of total sales.
There has been a slight slowdown in business during 2014. Specifically, lower oil prices have resulted in marginally less activity at some of the domestic shale oil fields. That could weigh on the rig count in the near term. In addition, the company has experienced only modest revenue gains lately. Consequently, we are reducing our 2014 earnings per share estimate below the 15-20% growth range we think Core might have achieved in boom times. Still, it is to management’s credit that healthy bottom-line growth can be realized even with only a minor top-line gain. Margin expansion and share repurchases are the plus factor in that regard. For 2015, we now look for another solid earnings gain, assuming the business climate improves only modestly.
Looking out to decade’s end, our projections call for earnings to advance at a low-to mid-teens percentage rate. We are assuming customers will view deepwater drilling as increasingly essential, as was the case prior to the development of shale fields. Approximately 20% of Core Laboratories’ revenues are derived from deepwater projects, which are among the most profitable. Part of our thinking is that if the producing companies are vigorously pursuing the more costly deepwater endeavors, other types of drilling must already be in high gear, as well.
Even so, the shares have had a rough time throughout 2014, recently dropping to a year low. We think that can be traced partly to investors focusing on oil prices and the resulting moderate slowdown in business of late. Nevertheless, the stock does offer attractive recovery possibilities over the 2017-2019 horizon. Indications of improved economic growth would likely provide a catalyst, by giving support to oil prices.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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