Levi Strauss Is A Good Fit Despite Headwinds

October 10, 2022 at 13:00 PM EDT

Levi Strauss (NYSE: LEVI) had a challenging quarter and if forecasting more of the same for itself if not for names like Ralph Lauren, V.F. Corporation (NYSE: VFC), or PVH Corp (NYSE: PVH). Supply chain and FX headwinds are cutting into the top and bottom line resulting in weak results and a cut to the guidance. The analysts, however, still view this stock as a buy despite these headwinds and there are many reasons to choose from. Among them are the valuation, the dividend, the underlying strength of the business, and the balance sheet which all suggest safe dividend payments, a positive outlook for distribution growth, and capital appreciation.

Sell-Side Sentiment Mixed But The Analysts Say Buy

Insidertrades.com is tracking 10 analysts with current commentaries and they rate the stock a Moderate Buy verging on Firm Buy. The sentiment is down a bit from earlier in the year and last year but this is due to a single downgrade to neutral that came out in August. The rest of the group has the stock pegged in a range from weak Buy to Outperform with a price target that is still 72% above the current price action. The price target has come down since last year, last quarter, and even last month but there are signs of stabilization within the data. There’ve been five major sell-side reports since the FQ3 results were released including 1 price target increase to $23. That’s still below the consensus of $24.18 but it helps raise the floor which, by the way, is $19 and 35% above the current price action.

The insiders and institutions have been net sellers of the stock over the past 2 to 3 quarters but there are some mitigating factors to be aware of. In regard to the insiders, their activity is minimal, down significantly from last year, and primarily the responsibility of a single party. Mr. Seth Jaffe, EVP and general counsel, has been selling shares off and on for the last year but still owns a sizeable amount as do the insiders in general, bout 3.7% altogether. The institutions own about 17.81% and have also been net sellers of the stock but that is offset by 1) total activity is in decline and 2) buying has been active as well, nearly offsetting the selling, and speaks of rotation rather than outright bearishness.

Levi Strauss Has A Weak Quarter?

Levi Strauss had a weak quarter but only in regard to the analyst consensus expectations. The company’s Q3 revenue missed by 500 basis points but still resulted in a 1.3% gain over last year and quarterly record. The bad news is that supply chain headwinds in the US shaved about 250 basis points off the top line while FX-related issues shaved another 700. Factoring those issues out of the equation the company would have performed much better but that’s a what-if. Moving on to earnings, the company’s margins contracted at the gross and operating levels as expected but less than expected as well. This left the adjusted $0.40 in EPS $0.03 better than consensus but offset by an outlook for weak Q4 results as well.

The takeaway for investors is that demand is still strong and the company is still generating growth and free cash flow. The company reports its balance sheet is strong and has a cash position of $499 million and is net cash with a leverage ratio of only 1.1X. That’s down from last year and coupled with a 42% increase in inventory as well as a capital return program. The company pays a dividend worth 2.85% in yield with shares trading at $14.00 and also repurchases shares. The total capital return for the quarter was $74 million which is easily sustainable.

The Technical Outlook: Levi Strauss Falls To Bargain Basement Territory

The price action in Levi Strauss dropped more than 11% in the wake of the Q3 report and it may fall further. The salient point is that, at these levels, the stock is trading at only 9.6X its earnings and trading well below its prepandemic value while selling more jeans and sustaining strong cash flow. Price action may fall further but I would expect to see a bottom form soon.

Levi Strauss Is A Good Fit Despite Headwinds