May 8, 2022
Some of you may remember the article Warren Buffett published in October of 2008 in the midst of credit market crisis “Buy American. I am”.
Such long-term and balanced perspective is always a healthy ingredient worth adding to the toxic cocktail of stock market story of volatility, emotions, sentiment, and short-term perspective.
On May 6th, 2022, Kontoor Brands, reported first quarter 2022 results. Kontoor is a global lifestyle apparel company with a portfolio led by two of the world’s most iconic consumer brands, Wrangler, and Lee. Company stated that it has confidence in raising fiscal year revenue and EPS guidance.
Kontoor Brands was a 2019 spin-off from VF Corporation. 90% of company’s revenue comes from U.S. and international wholesale channel, and this makes the company interesting as it does not possess all the risks usually present in retail companies that operate a large network of own retail locations.
Kontoor Brands also pays a quarterly dividend of $0.46 per share which at current share price provides an attractive annual dividend yield of 4.34% percent.
In addition to this, during FY 2021 company spent $75 million on share repurchases.
Since spin-off in 2019, shares performed reasonably well (including covid period) and returned approximately 29% since start of trading in May 2019.
Kontoor Brands is currently valued at an EV/EBITDA multiple of x7.9 (FY 2021 Adj EBITDA). Using our valuation assumptions and applying an EV/EBITDA valuation of multiple of x10 we believe that shares of Kontoor Brands could be valued at $86.5 per share in three years.
This would provide an upside of more than 100% or approximately 33% percent annual return.
We therefore believe that you should not buy the stories some sell-side analysts are trying to sell you and instead focus on real and true story – attractive valuation multiple, earnings beat, share buyback and attractive free cash flow generation profile.