The Big Rally In YETI Stock Is For Real

Sometimes, when a company goes public, there’s a lot of hype surrounding that company, so the stock explodes higher following the initial public offering, or IPO. Then, that hype cools down, reality settles in, and the stock falls.

This pop-and-drop IPO dynamic happens time and time again. See GoPro (NASDAQ:GPRO), Fitbit (NYSE:FIT), or Shake Shack (NYSE:SHAK).

Although that pattern does tend to repeat itself often, it isn’t what’s happening with shares of YETI (NYSE:YETI). The outdoors consumer products brand went public at $18 per share in late 2018. The IPO wasn’t a huge success. Shares actually traded down on their first day on Wall Street. But YETI stock has been nothing but a huge success ever since, as back-to-back strong earnings reports have powered shares to above $30 today.

This rally, unlike post-IPO rallies for peer outdoors consumer products brands GoPro and Fitbit, is for real. Yeti is a stable and healthy brand in a stable and healthy outdoors recreation market, with stable and healthy margins — and stable and healthy go-forward growth catalysts. In other words, the whole growth narrative here is stable and healthy.

At $30, stable and healthy is partially priced into YETI stock — but not fully. Indeed, given the company’s long-term growth potential, YETI stock isn’t fully valued until the mid-to-upper $30’s.

Given this, I think the post-IPO rally in YETI stock has legs. This stock should close the year closer to $40 than $30.

Stable & Healthy Is YETI’s Calling Card

In short, YETI stock is supported by healthy and stable go-forward growth fundamentals, which support further gains in the stock.

Let’s look at the numbers. Depending on who you ask, the outdoors recreation market in the U.S. (including apparel, gear, and activities) measures somewhere north of $300 billion, and likely closer to $600 billion-plus. That market is growing anywhere between 5% and 10% per year, supported by a rise in the experience economy, active lifestyles and travel. Within that broad outdoors market, products account for roughly $120 billion in annual revenue. Revenues there are presumably rising at a healthy, high-single-digit growth rate, too.

Within that industry, YETI is a small (less than $1 billion in revenues projected for 2019), but important (people need coolers and drink ware) and stable player (YETI is top dog in the cooler niche). From this perspective alone, assuming secular trends continue to power healthy revenue growth across the whole outdoors category for the foreseeable future, YETI projects as a healthy grower for the next several years, too.

Further, YETI is launching new products to extend beyond its niche, pushing hard on the international front, and rapidly expanding its DTC business. All those initiatives imply potential market share expansion and addressable market growth.

In other words, not only does YETI project as a healthy and stable grower for the next several years, but several go-forward catalysts imply that 10%-plus revenue growth is achievable for this company. If the company can grow at that rate, and margins improve with scale, then the rally in YETI stock is far from over.

The Valuation Remains Attractive

Earnings next year are projected at roughly $1 per share. YETI stock changes hands at around $30. Thus, this stock trades at around 30 times forward earnings. That’s a big multiple. The average consumer discretionary retail stock trades at 25 times forward earnings.

But, YETI isn’t your average consumer discretionary stock. Thanks to strong market positioning, potential share expansion catalysts and healthy tailwinds across the whole outdoors industry, YETI has clear visibility to 10%-plus revenue growth over the next several years. Meanwhile, the company’s margin profile is depressed relative to other premium players, and 10%-plus revenue growth should allow for adequate opex leverage to close this gap.

As such, YETI projects as a 10%-plus revenue grower over the next few years with healthy margin drivers. That combination leads me to believe that this company can do about $2.50 in earnings per share by 2025. Based on a sector-average 25 forward multiple, that implies a reasonable 2025 price target for YETI stock of over $60. Discounted back by 10% per year, that equates to a 2019 price target in the upper $30’s.

Bottom Line on YETI Stock

Unlike other post-IPO rallies, this post-IPO rally in YETI stock has legs, mostly because the valuation remains reasonable and the fundamentals remain favorable. So long as both of those things remain true, the post-IPO rally in YETI stock will continue.

As of this writing, Luke Lango was long YETI. 

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