PVH’s 13.4% return over the past six months has outpaced the S&P 500 by 7.1%, and its stock price has climbed to $88.40 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in PVH, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think PVH Will Underperform?
We’re happy investors have made money, but we don't have much confidence in PVH. Here are three reasons there are better opportunities than PVH and a stock we'd rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Consumer Discretionary - Apparel and Accessories companies. This metric excludes currency movements, which are outside of PVH’s control and are not indicative of underlying demand.
Over the last two years, PVH’s constant currency revenue averaged 2.4% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests PVH might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Free Cash Flow Projections Disappoint
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts’ consensus estimates show they’re expecting PVH’s free cash flow margin of 6% for the last 12 months to remain the same.
3. New Investments Aren’t Moving the Needle
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, PVH’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.
Final Judgment
PVH falls short of our quality standards. With its shares beating the market recently, the stock trades at 7.5× forward P/E (or $88.40 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at one of our top software and edge computing picks.
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