When I evaluate an investment prospect, I do so with a long-term investment horizon in mind. Having said that, from time to time, a company will increase or decrease in value faster than I expected. when this comes To succeed, I would like to revisit the company and see if the basic outlook has changed for the better or for the worse. A great example of this in action can be seen by looking at Columbia Sportswear Company (Nasdaq: COLM), a company focusing on the design, development, marketing and distribution of apparel, footwear, accessories, equipment and other related goods. Driven by strong sales and improving earnings and cash flow, the company’s shares have continued to rise in recent months. Add to that the fact that the shares don’t appear to be unrealistically priced at the moment, and I’m going to make the case that despite the easy money being made, there’s probably still some potential profit on the table.
Mr. Market loves Columbia sportswear
Back in late August of this year, I wrote an article that took a positive stance on Columbia Sportswear. In this article, I talked about the company’s operating history, which included an overall rise in revenue and profitability over the past few years. But at the time, the company was showing some weakness in fiscal 2022. But that was based on results that only covered two quarters of the year. Despite these issues, I felt as though the stock was fundamentally attractive, particularly when it came to cash flow. I ultimately concluded that the company came forward with a modest “buy” probability, meaning I felt it was an opportunity that would outperform the broader market for the foreseeable future. Since then, the company has exceeded my own expectations. While the S&P 500 was down 3.9%, investors in Columbia Sportswear were up 16.5%.
Given that we only saw an additional quarter of the data, it seems that the reason for the increase lies in these numbers. Overall for the quarter, the company’s revenue was $955.1 million. This is 18.7% higher than $809.7 million in the same quarter last year. And had it not been for foreign currency fluctuations, sales would have been higher, reaching $984.6 million. The company’s biggest growth came from its signature Columbia brand name, with sales jumping 19% from $651.5 million to $799.9 million. On a percentage basis, the SOREL brand did better, jumping 28%. But since sales there account for only 11.8% of the company’s total revenue, the upside from a dollar perspective has been rather small.
Interestingly, the company’s biggest growth hasn’t come from its direct-to-consumer operations, but instead, from its wholesale business. Revenue there jumped about 24% year over year compared to 8% in the direct-to-consumer category. And when it comes to a particular product category, the real driver is footwear, as sales in that category jumped 25%. According to management, overall sales for the quarter were really driven by higher consumer demand. Unfortunately, management didn’t provide all that much additional data.
In the bottom line, the company’s image has also improved. Net income of $111.8 million was better than $100.6 million at the same time last year. This is not to say that every measure of profitability fared better. Our entry-level operating cash flow is down from $132. $8 million in the third quarter of 2021 to $215.4 million at the same time this year. But if we adjust for changes in working capital, it would have gone from $130.6 million to $145.5 million. Over the same time period, EBITDA also increased, jumping from $157 million to $173.3 million.
This strong quarter has been instrumental in driving the company’s top results for fiscal 2022 as a whole so far. Revenue in the first nine months of the year, for example, was just under $2.30 billion. This compares favorably with the $2 billion reported at the same time last year. However, at the same time, net income continues to struggle, dropping from $197.1 million to $185.8 million. Just as it was in the third quarter alone, operating cash flow was an issue. In the first nine months of fiscal 2021, cash flow came in negative to the tune of $15.6 million. This number at the same time this year is negative, amounting to $328.1 million. But if we adjust for changes in working capital, it’s still a little bit higher, going from $278.7 million to $290.8 million. A similar trajectory can be seen when looking at EBITDA, where the metric rose from $323.4 million to $324.2 million.
For 2022 as a whole, management expects revenue to be between $3.44 billion and $3.50 billion. At the halfway point, that would represent an increase of 11% from what the company saw in 2021. At the same time, earnings per share should be between $5 and $5.40. Using midpoint numbers here, that would translate to net income for the company of $323.5 million. Meanwhile, if we just adjust for annual results achieved so far this year for the rest of the profitability metrics, we’d get adjusted operating cash flow of $489.9 million and EBITDA totaling $568.5 million. Based on these numbers, the company is trading at a forward rate at an EBITDA multiple of 15.5, a forward rate at an adjusted operating cash flow multiple of 10.2, and a forward rate at an EBITDA multiple of 8.5. As you can see in the chart above, stocks have gotten cheaper in two of the three ways that are being looked at. The only way it went wrong was from a price-to-earnings perspective. As part of my analysis, I compared the company to five similar companies. On a price-to-earnings basis, these companies ranged from 4.6 to 30.7. In the end, four of the five companies are cheaper than our target. Meanwhile, using the price for operating cash flow approach, the range ranged from 7.3 to 68.6. And for the EV-to-EBITDA approach, the range was between 4.1 and 10.2. In both scenarios, three of the five companies were cheaper than we expected.
|a company||Price/earnings||Price/operating cash flow||EV/EBITDA|
|Columbia Sportswear Company||15.5||10.2||8.5|
|PVH Corporation (PVH)||4.6||7.3||4.1|
|Under Armor (UAA)||30.7||34.2||10.2|
|Gildan Activir (gel)||8.6||10.0||7.5|
At the moment, I would say Columbia Sportswear is doing exceptionally well. Having said that, there is some possibility that the bottom line results could get worse, especially if economic conditions worsen. Relative to comparable companies, Enterprise shares appear to be closer to fair value, while on an absolute basis they appear to offer some additional upside. Given the company’s strong performance in these markets, and how reasonably priced the stock looks on an absolute basis, I would rate the company as a very weak “Buy” for now.