Has Columbia Sportswear’s Stock Run Out Of Steam After Its 40% Rally?

COLM: Columbia Sportswear Company logo
COLM
Columbia Sportswear Company

Despite a 40% rise since the March 23 lows of this year, at the current price of $80 per share we believe Columbia Sportswear stock (NASDAQ: COLM) has reached its near term potential. Columbia stock has rallied from $56 to $80 off the recent bottom compared to the S&P which also moved around 40% over the same time period.  Gradual store openings, as well as Columbia Sportswear’s strong direct-to-consumer reach has helped the stock beat the broader markets. Moreover, the stock is up 15% from levels seen in early 2018, over two years ago. While the stock is below the peak level it was at before the drop in February it appears fairly priced as demand and revenues will be well below the figure last year. Our dashboard ‘Why Columbia Sportswear Stock moved 15%?’ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price rise over the last 2 years is justified by the roughly 23% growth seen in Columbia Sportswear’s revenues from $2.5 billion in 2017 to $4 billion in 2019. This combined with a 2.4x jump in net income margin from 4.6% in 2017 to 10.9% in 2019 and a reduction in share count due to stock repurchases worth $324 million helped earnings per share basis swell 222.5%. Notably, Columbia Sportswear’s margin expanded as a result of robust revenue growth coupled with lower product costs, a favorable mix of higher-margin products, and lower markdowns.

However, a sizable drop in Columbia Sportswear’s P/E multiple partially mitigated gains to its stock from an upbeat earnings trend. Columbia Sportswear’s P/E ratio fell from about 47x (P/E was unusually high due to lower EPS, resulting from changes in the tax rate) at the end of 2017 to 21x at the end of 2019. The company ‘s P/E has now decreased to 17x, and while it may appear to be undervalued when compared to the P/E levels seen in the recent past (P/E of 21x at the end of 2019 and 22x  as recent as late 2018), we believe the stock is fairly valued and is unlikely to see any upside keeping in mind the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

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How Is Coronavirus Impacting Columbia Sportswear’s Stock?

The Coronavirus crisis has hit the apparel industry hard, and COLM is no exception. Fading consumer demand, reduced discretionary spending, rising unemployment levels, and stay-at-home orders resulting in store remaining closed continue to take their toll on the apparel industry. The impact of Covid-19 was clearly visible in the company’s first-quarter results (ending March), resulting in revenues plunging by nearly 13%. Moreover, the lockdown in most countries was imposed towards the end of March and the impact on the company’s Q2 2020 results will be quite prominent.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new COVID-19 cases in the U.S. compared to the rate seen in April-May to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to look through the current weak period and take a longer-term view. With investors focusing their attention on FY2021 results, the valuations vs historic valuations become important in finding value.

While Columbia Sportswear is outperforming, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising

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