As I scoured companies in roughly the same space as Under Armour, I landed on a boring company called VF Corporation (VFC). The company was founded in 1899, and although I had not directly heard of it before, I was familiar with many of the brands in its portfolio. They are shown in the following picture from its 2015 annual report.
VFC actively manages it brands: investing into strengthening brands, and divesting weak ones. For example, in 2016, they got rid of their “contemporary brands” segment, listed in the graphic above, and in 2007, it divested its Vanity Fair intimate apparel line.
Its market cap is $22B, it is one of the largest apparel companies doing over $12B in revenues, last year. While topline growth stalled last year, its 3-, 5-, and 10-year compounded growth rates have been 2.7%, 5.5%, and 7.7%, respectively. Many of its outdoor and sports brands seem to have secular tailwinds, so modest growth should persist for as long as the eye can see.
If there is one phrase that encapsulates VFC, it is slow and steady. It doesn’t sport the spectacular 20%+ growth rates of Under Armour, or the mindshare that Nike commands. But it has been growing for a long time at a rate marginally faster than the overall economy. It is solidly profitable: operating income has compounded at a 6.8% annual rate over the past ten years, and operating margins have held steady around 13%. Its debt/capital ratio has hovered around 32%, and the median tax rate has been about 25%. Its median return on equity and capital have been 17.8% and 9.6%, respectively. It is remarkable, how small the standard deviations around these average values have been. Everything about VFC seems to be unspectacular. Even the decline in share count from 442M in 2006 to 419M in 2016.
Given the nature of the company, the balance sheet sports a lot of goodwill and intangibles. In fact, tangible book value is only about a fourth of the total book value. Thus, the balance sheet doesn’t seem like a good place to start in valuing VFC.
Given its steady nature, one can use a simple earnings power value type model. Let’s use some reasonable numbers and see what we can come up with. VFC’s normalized earnings seem to be slightly shy of $3/share. Its total $2.3B of debt is quite cheap; Morningstar gives it debt an A rating, and the weighted cost of debt is about 3.5%. Given its tax rate (~25%), the after tax cost of debt is about 2.6%. It sports a very low beta (lower than 1, depending on how you look at it). Using standard numbers and debt/capital ratio of 0.32, the cost of capital is about 6%. VFC has a really low cost of capital, due to its stability. As we noted above, the ROIC is about 3% over its cost of capital, which means steady growth is value enhancing.
If we stick these numbers in the Gordon growth model, and assume terminal growth rate of 2.25%, we can justify a PE multiple, 1/(COC – stable growth), of 25. Using more conservative numbers (COC = 7%), we can justify a PE multiple of 20. Thus, a fair value for VFC may be in the $60-$70 range. Its steady profitable growth, and stable characteristics, which result in extremely low cost of capital are the primary value drivers. VFC also pays a substantial dividend of over 3% at today’s prices (~$53), so owners are compensated to hold until the stock reaches fair value. It is also interesting to note that in the past 5 years, VFC has traded at TTM PE multiples between 16 and 25, which imply a valuation band between $51 and $81. Given the dearth of investing opportunities in the market today, it seems like VFC might be a decent low-risk moderate-reward bet.