Acquisitions Are Part of Growth Strategy

In this article, let's take a look at PVH Corp. (PVH, Financial), a $9.15 billion market cap company, which designs, sources, manufactures, markets, licenses and distributes a broad line of men's and women's apparel worldwide under several widely recognized brand names, like ARROW, Van Heusen, IZOD, Calvin Klein and Tommy Hilfiger.

Market potential

The company operates in an industry which includes very well-known brands such as Nike (NKE, Financial), Coach (COH, Financial), Luxottica Group (LUX, Financial), Ralph Lauren (RL, Financial), Fossil (FOSL, Financial), Under Armour (UA, Financial), HanesBrands (HBI, Financial),Columbia Sportswear (COLM, Financial), Crocs (CROX, Financial), and Movado Group (MOV, Financial). Despite this, we believe the firm will continue to develop its leading brand portfolio.

Warnaco acquisition

PVH made three remarkable acquisitions in the past. In 2003, it acquired Calvin Klein, Inc. and in 2010 it acquired Tommy Hilfiger B.V. from Apax Partners L.P.

In 2013, the company acquired The Warnaco Group, Inc. which was the company's largest licensee for Calvin Klein products. As a result of the acquisition, more focus on the Calvin Klein segment is expected. The Warnaco's international operations help Tommy and other brands in Asia and Latin America markets.

Talking about these markets, PVH focuses on emerging markets. As an example, we can mention the joint venture in Brazil about two years ago, in a promising country with several opportunities to grow.

Revenues, margins and profitability

Looking at profitability, revenues declined by 1% but earnings per share increased in the most recent quarter compared to the same quarter a year ago ($2.71 vs $2.37). During the past fiscal year, the firm reported lower earnings of $1.71 versus $5.87 in the prior year. This year, Wall Street expects an improvement in earnings ($7.29 versus $1.71).

The gross profit margin is considered high, at 55.11% and it has increased from the same quarter the previous year, and the net profit margin of 10.10% is above that of the industry mean.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 7.85% which is higher than the one exhibit by the industry median but lower when compared to Lululemon (LULU, Financial) and Fossil (FOSL, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative valuation

In terms of valuation, the stock sells at a trailing P/E of 26.4x, trading at a premium compared to an average of 25.1x for the industry. To use another metric, its price-to-book ratio of 2.0x indicates a premium versus the industry average of 1.89x while the price-to-sales ratio of 1.1x is above the industry average of 1.02x.

As we can see in the next chart, the stock price has an upward trend in the five-year period.

Growth of 10,000

If you had invested $10.000 five years ago, today you could have $31.669, which represents a 25.9% compound annual growth rate (CAGR).

Final comment

As outlined in the article, the acquisitions have become a growth driver for the company. Although the apparel retail manufacturing industry faces strong challenges, we believe PVH is a good bet for a diversify portfolio. Further, the recovery of some economies, like Italy, should help the firm to continue growing.

Hedge fund gurus like Jim Simons (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Larry Robbins (Trades, Portfolio) added this stock to their portfolios in their quarter of 2014, as well as Pioneer Investments (Trades, Portfolio).

Disclosure: Omar Venerio holds no position in any stocks mentioned