Over the past six months, PVH has been a great trade, beating the S&P 500 by 11.1%. Its stock price has climbed to $84.88, representing a healthy 24.5% increase. This was partly due 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? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think PVH Will Underperform?
Despite the momentum, we’re cautious about PVH. Here are three reasons why there are better opportunities than PVH, plus one stock we’d rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
Investors interested in Consumer Discretionary - Apparel and Accessories companies should track constant currency revenue in addition to reported revenue. 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 1.6% 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. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
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.
PVH has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 6.4%, below what we’d expect for a consumer discretionary business.
3. New Investments Bear Fruit as ROIC Jumps
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
On average, PVH’s ROIC increased by 1.8 percentage points annually each year over the last few years. This is a good sign, and we hope the company can continue improving.
Final Judgment
We see the value of companies helping consumers, but in the case of PVH, we’re out. With its shares beating the market recently, the stock trades at 7.1× forward P/E (or $84.88 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. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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