RealMoney Silver - PVH: Well Tailored, Well Run, Well Priced

PVH: Well Tailored, Well Run, Well Priced
By John Reese
RealMoney.com Contributor
3/13/2008 3:56 PM EDT

Phillips-Van Heusen (PVH) may be best known for its button-down shirts, but there is nothing buttoned-down about this company. Once famous for its model who wore an eye patch, Phillips is behind such shirt labels as Arrow, Chaps, Geoffrey Beene and Izod. It owns or licenses a number of other labels, including neckwear maker Superba, Kenneth Cole, Joseph Abboud, Calvin Klein and G.H. Bass shoes. It will soon be using the Izod name on women's sportswear and the Timberland name on apparel.

Companies like Phillips have been squeezed by consolidation in the department store industry and the move toward private-label apparel. But Phillips has proved adept at finding new brands to market and expanding the reach of its existing brands. Two guru strategies I use think Phillips is dressed well for the future.

One of these is based on the approach to investing used by Kenneth Fisher in his classic book, Super Stocks. This strategy looks for a price-to-sales ratio of no more than 0.75. This is a measure of how much you are paying for sales. Phillips just fits into this criteria with a P/S ratio of 0.75.

Also stylish is its debt-to-equity ratio, which is an acceptable 0.36:1. This strategy looks for companies with an inflation-adjusted EPS growth rate of more than 15%. Phillips' inflation adjusted growth rate of 33.87% (based on the average of the three- and four-year EPS growth rates from which the inflation rate is subtracted) is as strong a statement as a bold-striped shirt at a C-level luncheon. Another plus in the company's favor is its strong positive free cash per share of $3.69, and its three-year average net profit margin of 5.61% (5% is the minimum acceptable).

The second strategy that likes the looks of this company is the one I base on the writings of Peter Lynch. With its growth rate of about 36% (based on the four- and five-year historical growth rates), Phillips qualifies as a "fast grower," which means its growth rate exceeds 20%. The stock's P/E is a low 10.2. The strategy takes the P/E and divides it by the growth rate (the so-called PEG ratio), which is a measure of the desirability of the stock price based on the company's growth. A PEG of 1.0 or less is acceptable, and below 0.5 is very strong. Phillips' PEG is a high-steppin' 0.28, fancy enough for any black-tie sitdown.

For companies with sales greater than $1 billion, this methodology likes to see the P/E ratio remain below 40. Phillips' sales are $2.4 billion, and its P/E is, as noted, 10.2, way below the maximum set by the strategy.

Also considered is how well management controls inventories. Inventories and sales should increase (or decrease) at about the same rate. That proves true for Phillips, whose inventory-to-sales ratio last year was 13.50%, and this year is negligibly higher at 13.63%. The final variable considered is the debt-to-equity ratio. And, as with the Fisher strategy, Phillips' D/E ratio is at an acceptable level.

I go into detail about why the Fisher and Lynch strategies like Phillips, because they are the most favorably impressed by it. But another strategy I use, the one based on John Neff's writings, also thinks Phillips is decked out for the future. This strategy looks at what the analysts are saying about future growth; it wants their consensus figure to be 6% or more for dividend-paying stocks. Phillips looks dressed to kill, having a projected EPS growth rate of 20.5% for the current year and 16.0% for the long term. The Neff strategy also looks for low-priced stocks - namely, those whose P/E is 40% to 60% below the market P/E. That range at present is 8.00 to 12.00, and Phillips fits right in the middle, with its P/E of 10.2.

Phillips is in the rather prosaic business of men's dress shirts and other apparel. It is not a cutting-edge fashion house, but it is a company that caters to a range of customers who want quality at a decent price. It has been performing well financially, and appears well dressed to weather any future storms in the market. This stock is well tailored to fit any portfolio.