A Mixed Outlook for This Growth Stock: V.F. Corporation (VFC)

Asian Growth?

As recently as September VFC was talking about a 5-year CAGR of 17% for overall Asian sales, but I note it is forecasting low-teens growth for 2013. I’ve discussed the issues at Lee; The North Face, however, has some challenging targets to hit in 2013. Management expects global North Face revenues to grow at high single digits in 2013 but in the mid-teens for international with 30% growth penciled in from Asia. It’s hard for me to question a management as gifted as VFC has, but opening 200 stores and achieving the larger part of that 30% growth in China (which has seen growth moderate) seems a big ask.

Companies like Yum! Brands, Inc. (NYSE:YUM) have been reporting weaker growth in China, and their share prices have suffered as a consequence. Yum’s problems are not just about the chicken scare, its same store sales growth has been slowing for some time, and the company has made China the focal point of its growth drive.

Things to Look Out for in 2013

While the Chinese growth plans are something to ponder in 2013, the Asian region still only makes up 8% of current sales. In other words, it might not matter that much if they miss. Europe’s difficulties are more important, and it’s here that the downside surprise could occur. The clement weather of the 2012/13 winter has caused some operational issues at The North Face and Timberland, but I would argue that this is largely in the price right now. If you buy the stock now you are more worried about what next winter will bring.

Adjusted EPS is forecast to rise 11% in 2013 to hit $10.7 with revenues up 6%. The margin story is better too with gross and operating margins forecast to grow 100bp. All of which leads into free cash flow of around $1.1 billion. That’s not bad for a company on an enterprise value of $18.7 billion and a share price of $158; if it seamlessly hits its guidance I think it could trade closer to $180. Moreover, this company does have a tradition of exceeding internal guidance.

My caveat here is that I’m sure its share price will go lower if it comes out and says something like ‘the mild winter plus Europe caused greater than expected pricing pressure in the first half but we are maintaining our full year guidance.’  Then I would be a buyer because at this price it looks close to fair value for the risk.

The article A Mixed Outlook for This Growth Stock originally appeared on Fool.com and is written by Lee Samaha.

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