Urban Outfitters (NASDAQ:URBN) stock now trades near record highs. The Philadelphia-based clothing retailer has risen higher on improving profits and reduced fears over online threats. However, with the massive increase in the stock price, investors might wonder if they waited too long to buy URBN stock.
Between the fact that the stock has moved close to fair value and the nature of the industry in which URBN operates, investors should hold off at these levels.
URBN Fully Recovered From Last Year’s Retail Slump
One thing that should impress investors is the company’s staying power. Since its founding in 1970, it has managed to open over 400 stores across three continents under the Urban Outfitters name alone. Like Gap, it has also opened stores under different names. Anthropologie alone accounts for over 200 additional stores. Free People, Terrain, BHLDN, and the Ventri Group also operate under the URBN umbrella.
URBN stock has also enjoyed a huge comeback. The stock fell for much of 2016 and 2017 due to fears over e-commerce players such as Amazon (NASDAQ:AMZN). The equity, along with peers such as Abercrombie & Fitch (NYSE:ANF), The Gap (NYSE:GPS), and American Eagle (NYSE:AEO) suffered from the perception that Amazon would take over retail.
After the summer of 2017 and a successful Christmas shopping season, the stock made a comeback. In a little over 11 months, the stock price surged by over 170%. Today, URBN trades near all-time highs.
Profits have also seen a comeback. Over the last few years, profits suffered a modest downward trend. URBN hit a multi-year low of 96 cents per share in the previous fiscal year. However, this was due to a one-time write-down related to the Tax Cuts and Jobs Act. This year, analysts estimate the company will earn $2.50 per share. This takes the forward price-to-earnings (PE) ratio to about 18.3. Though earnings growth may level off over the next couple of years, Wall Street forecasts average earnings growth of 15.5% per year over the next five years.
Should I Buy?
With that, the question becomes: Is URBN stock a buy? The short answer is yes if forced into a definitive “yes or no” answer. Still, the stock trades so close to fair value that I would consider it a hold for most intents and purposes. The average PE over the last five years stands at around 19.4. However, when figuring the forward price-to-earnings-to-growth (PEG) ratio, that comes out to 1.18. The average PEG ratio for the S&P 500 holds at about 1.33. Both measurements indicate URBN stock trades modestly under its fair value.
Given that, I see little benefit coming from buying or selling at this level. The odds of repeating the 170% move upward are not great. Also, a more concerning factor relates to the company’s lack of a moat. Clothing trends are always fickle, particularly with the millennial demographic served by this company. Consumers have thousands of choices when it comes to places to purchase clothing. If the company misreads those trends, consumers can go elsewhere.
Bottom Line on URBBNN stock
URBN stock has surged close to fair value, and investors should probably hold off on further buying for this reason. Urban Outfitters has recovered from the Amazon-inspired retail apocalypse. Now, the stock trades at all-time highs despite trading at an average PE ratio. Still, URBN will likely not repeat the recent increase in the stock price.
Moreover, clothing is a trend-driven, fickle, no-moat business. With a track record going back 48 years, URBN performs better than most when it comes to staying on top of trends. However, given that a stock can turn south on a basis most cannot define, such a stock only interests me at a substantial discount.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
