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Try PVH on for Size, Leave Warnaco on the Rack

PVH has posted more upside surprises


Demand in emerging markets for prestigious U.S. brands is turning the mundane clothing industry into a fast grower. And that trend is helping PVH Corp. (NYSE:PVH) and Warnaco (NYSE:WRC) to post strong financial results. But should you invest in either stock?

In 2011, IBISWorld estimates that global apparel sales will total $449 billion, 3% higher than in 2010. And exports account for a whopping 69% of the total. Manufacturing location varies by price level. Less expensive apparel is made in developing regions of Asia and South America, while “designers, large wholesalers and retailers are predominantly located in Europe, the U.S. and developed Asian countries, such as Hong Kong and Japan,” according to IBISWorld.

PVH is benefiting from exports of its Tommy Hilfiger and Calvin Klein brands in international markets. And that explains how its third-quarter results exceeded expectations when it reported Thursday after the bell.

Its results were great, beating analyst’s top- and bottom-line expectations, and the stock is up 6% in early Friday trading. PVH’s best brands were Tommy Hilfiger, with sales rising 17%, and Calvin Klein, enjoying an 11% increase.

Warnaco also saw growth in its most recent report — and also benefited from international demand. Its third-quarter sales rose 8%, thanks to international sales (up 16%) and so-called direct-to-consumer (up 31%) demand growth. The bad news was that its U.S. sales were down 3%. However, Warnaco’s adjusted earnings met analysts’ estimates.

So here’s what the investment choice between PVH and Warnaco boils down to:

  • PVH: fast-growing, thin margins; slightly expensive stock. PVH sales have risen 93% in the past 12 months to $5.6 million while its net income plunged 68% to $251 million — yielding a thin 4.6% net margin. Its price-to-earnings-to-growth ratio (where a PEG of 1.0 is considered fairly priced) of 1.07 is a bit pricey on a P/E of 16.1 and expected earnings growth of 15% to $5.87 a share in fiscal year 2013.
  • Warnaco: fast-growing, good margins; fairly pricey stock. Warnaco sales have increased 13.7% in the past 12 months to $2.5 billion, while net income has soared 44.5% to $165 million – yielding a decent 6.7% net margin. Its PEG of 1.15 is slightly overvalued on a P/E of 13.5 and expected earnings growth of 11.7% to $4.50 a share in 2012.

Neither of these stocks is a screaming buy, because their valuations on expected earnings growth are not cheap. However, PVH has done a better job of exceeding expectations and its current valuation is relatively low. But the company has work to do in trimming weak brands and boosting its margins.

If management makes progress on that front, I’d expect the stock to rise — particularly if it can keep beating expectations. By contrast, Warnaco looks like it could hover in a trading range until management can find an EPS growth catalyst.

Peter Cohan has no financial interest in the securities mentioned.

Article printed from InvestorPlace Media,

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