What a brutal six months it’s been for VF Corp. The stock has dropped 28.4% and now trades at $13.91, rattling many shareholders. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy VF Corp, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think VF Corp Will Underperform?
Even with the cheaper entry price, we’re cautious about VF Corp. Here are three reasons why there are better opportunities than VFC, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. VF Corp’s demand was weak over the last five years as its sales fell at a 2.1% annual rate. This wasn’t a great result and is a sign of poor business quality.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
VF Corp 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 4.6%, below what we’d expect for a consumer discretionary business.
3. New Investments Fail to Bear Fruit as ROIC Declines
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, VF Corp’s ROIC decreased by 3.3 percentage points annually each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of VF Corp, we’re out. After the recent drawdown, the stock trades at 12× forward P/E (or $13.91 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. Let us point you toward one of Charlie Munger’s all-time favorite businesses.
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