Jeans manufacturer Kontoor Brands (KTB) has been on the roll in recent months. The company's shares were decimated in the early days of the pandemic crisis, but after making a solid bottom in the $ 1
The clothing stock was smashed back in March because the shops were closed, and with home orders in place, there was simply no reason to buy new clothes. However, that has changed, and Kontoor has reacted accordingly.
We can see that the clothing group has surpassed the S&P 500 since the bottom and beat an impressive gain from the wider market by almost 20%. This group has then been a very strong pick of shares from the last few months.
In the bottom panel we can see that while Kontoor underperformed its group at the beginning of the year, it has made up much of the ground too late. Thus, we have a strong share within a strong group, which is exactly the type of shares I want to own. This alone does not make a stock a buy, but it is a great starting point.
Back in May, when pandemic sales were approaching exhaustion, I wrote that Kontoor represented deep value. The idea was simple; the stock was priced like a recovery would never come, which seemed highly unlikely. The shares were way too cheap, and since my buy call, the stock increased more than 100%. It's great, and since I'm far from winning my calls, it's a nice confirmation to get a home run like this. But when a population has doubled in a few months, it is worth seeing if the bull case is still intact.
In short, I think the basic matter of the Office is still very much intact. Consumers have proven that they want to spend extra money to buy furniture, cars, boats or anything else they want instead of spending money on commuting, ordering lunch at the office, vacations and everything else that has been reduced due to. this new lifestyle. It includes clothing, and we have seen many types of clothing manufacturers thrive in this environment, with jeans manufacturers as one.
In fact, Levi Strauss (LEVI) reported a Q3 result and strong guidance just a few weeks ago, a business very similar to Kontoor. Given the turnout in the share price for Kontoor, it seems to me that institutional investors are betting on a strong report when Kontoor comes out with its own earnings on the 29th so I would certainly not be surprised to see a similar story from Kontoor as it we saw from Levi Strauss.
I also think we could get some kind of news about the previously suspended dividend when Kontoor reports. The company suspended the payment during the worst early days of the pandemic and has not reintroduced the payment. But with strong earnings on tap and much more clarity in the recovery, I see no reason for Kontoor to continue to hold back. If we get an announcement about the dividend, it will be another positive for the stock.
Of course, when a stock has doubled, it is obvious to do to examine the valuation. When we look at the valuation in May – which is copied from my link article above – it's easy to see why I said that Kontoor offered deep value.
Source: Seeking Alpha
The valuations of future earnings were completely absurd at the time, with stock trading for 5 times earnings.
If we look at the same numbers today, the valuation has obviously risen, but we are still at very reasonable levels.
Source: Seeking Alpha
EPS estimates for 2021 and 2022 are largely the same as five months ago, so valuations have increased significantly. However, we are still talking about ~ 12 times earnings for both years at the current valuation, and that is after the stock has doubled.
Source: Seeking Alpha
It certainly seems to me that the downgrades in EPS have ceased, as estimates for 2021 and 2022 have leveled off and moved somewhat higher. This means that we will not see any nasty surprises down, and given the strength from Levi the last couple of weeks, I am a little surprised that estimates have not increased more than this for Kontoor.
The good news is that even though Kontor's valuation has risen, it is still much cheaper than LEVI, which trades 17 times next year's earnings and 14 times 2022 estimates. Kontoor trades for approximately a 30% discount on LEVI's 2021 earnings, and approximately 15% until 2022. This does not guarantee that Kontoor will need to trade at exactly the same valuation, but it is a very interesting measure to measure by. [19659021Bottomline
Given the fact that Levi Strauss reported outstanding earnings earlier this month, the fact that we continue to see a strong rebound in clothing stocks in various sub-sectors, Kontoor's still cheap valuation, its discount to Levi Strauss, the idea that dividends can be reinstated, and the fact that revenue audits have stopped declining, I still think Kontoor is a purchase.
To be perfectly clear, Kontoor is nowhere near as good a purchase as it was back in May, and I do not think it is deep value anymore. However, the stock still looks relatively cheap, and with the prospect of dividends on the horizon, I think it is still attractive.
Information: I / we have no positions in any of the aforementioned shares, and have no plans to start any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for that (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.