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Dr. Paul Price
Dr. Paul Price
Articles (513)  | Author's Website |

Play Some Polo

June 17, 2014 | About:

Don't be a snob. Play Polo.

Great companies create shareholder wealth over time. They grow their sales, cash flow, earnings and dividends. Increased value will ultimately be reflected in the stock price. When fundamentals and market performance diverge… smart investors see opportunity.

That appears to be the case right now with the iconic fashion company Polo Ralph Lauren (NYSE:RL). The stock is now trading near its lowest valuation in quite some time, even as the firm’s overall statistics are at the high end of the range.

The decade ended Mar. 29, 2014, was quite impressive. That's especially true because it spanned the 'Great Recession' years of 2008-2009.

Growth was achieved with internally generated funds. The firm carries almost no long-term debt. Polo RL shares have outperformed 95% of Value Line’s 1700-company main research universe while also staying in the top echelon in terms of earnings predictability.

As of June 16, 2014, RL’s 10-year total return for the buy-and-hold crowd was a fashionable 343%.

EPS set a new record in FY 2013 and are expected to grow slightly again, to about $8.70 this year, despite the significant capital spending,designed to bring larger future profits, which caused management to lower guidance from $9.30. The Zacks estimate for FY 2015 is now focused on $9.92. Morningstar is more optimistic, seeing $10.26 by then.

Polo Ralph Lauren compares quite favorably with industry peers in all the most important categories yet its shares trade at a discount to the group. That is a nice combination.

RL retreated briefly to about $142 on the guidance downgrade but has rebounded a bit since then. The stock closed at $153 on Monday, Jun. 16th.

RL sold for an average multiple of 19.1x during the four-year period 2010 – 2013. Traders with12- 18 month horizons could expect to see RL north of $189 again on a simple regression to the mean. Further out, upside is much better.

My goals do not include the well-covered,and rising,1.18% current yield. Those targets may end up being too conservative in light of the historical CY 2012 & 2013 highs of $182.50 and $192.00, on sales and earnings that were below today's level. When traders' mood were more positive on RL, the shares often commanded much higher P/Es (see chart below).

Polo merchandise is rarely available at big mark-downs. Top-quality generally costs more. Act now and you can lock in a premier growth stock at barely any premium to the market. That’s always a stylish investment choice.

Disclosure: Long RL shares, short RL Jan. 2016, $140, $150, and $170 strike price puts

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Dr. Paul Price


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