VF Corp has been on fire lately. In the past six months alone, the company’s stock price has rocketed 62.7%, reaching $20.27 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy VF Corp, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think VF Corp Will Underperform?
Despite the momentum, we're sitting this one out for now. Here are three reasons you should be careful with VFC and a stock we'd rather own.
1. Declining Constant Currency Revenue, Demand Takes a Hit
We can better understand Apparel and Accessories companies by analyzing their constant currency revenue. This metric excludes currency movements, which are outside of VF Corp’s control and are not indicative of underlying demand.
Over the last two years, VF Corp’s constant currency revenue averaged 6% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests VF Corp might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. 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).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, VF Corp’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
VF Corp’s $5.79 billion of debt exceeds the $419.1 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $889 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. VF Corp could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope VF Corp can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of VF Corp, we’re out. Following the recent surge, the stock trades at 23.5× forward P/E (or $20.27 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of VF Corp
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