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Men’s Wearhouse Shares Look One Size Too Big

Future upside surprises may already be priced in

   

Men’s Wearhouse (NYSE:MW) enjoyed an eye-popping 15% spike in its stock Thursday after saying its first-quarter profit would beat Wall Street’s current estimates. The question for investors is whether the company will continue to surprise on the upside or its best days are behind it.

Men’s Wearhouse sells suits, and its CEO spends quite a bit of his money on telling TV viewers that he guarantees customer satisfaction. George Zimmer’s confidence in that claim reminds me of me of Dos Equis beer’s Most Interesting Man in the World.

And Men’s Wearhouse’s first-quarter earnings forecast certainly suggests that confidence has its rewards. The upside surprise flows from positive consumer response to its so-called value offerings. The result was that revenue rose 10.8% at its Men’s Wearhouse stores, 9.3% at its K&G stores and 6% at its Moore’s Canada stores.

Is Thursday’s good news, which propelled Men’s Wearhouse stock to a 52 week high, sufficient to warrant a buy order? To make that decision, you might consider using the price-to-earnings-to-growth (PEG) ratio that compares a stock’s market valuation to its forecasted earnings growth. By that measure, if a stock trades at a PEG of 1.0 or lower, it is reasonably priced. Higher than that, and it looks overvalued.
 
Based on PEG of 1.67, Men’s Wearhouse looks expensive. After all, it trades at a P/E of 25 and its earnings are forecast to grow 15% to $2.08 in 2012. If you look at the last five quarters, Men’s Wearhouse has surprised on the upside by an average of 28.5% — but that masks big differences each quarter. So that 2012 estimate could be on the low side.
 
On the other hand, Men’s Warehouse has a pretty big debt payment coming up within the next year that exceeds the amount of cash on its balance sheet. More specifically, it will need to repay $162 million worth of its $746 million in debt within the next year. And it had a mere $136 million in cash on its balance sheet in January, down $50 million from the year before.
 
Nevertheless, I think at a PEG of 1.67, the potential for yet another upside surprise may already be priced into the stock.

Peter Cohan has no financial interest in the securities mentioned.


Article printed from InvestorPlace Media, http://investorplace.com/2011/05/mens-wearhouse-shares-look-one-size-too-big/.

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