Why Levi Stock Deserves to Trade Below $20

Ever since blue jeans maker Levi Strauss (NYSE:LEVI) hit the public markets back in March 2019, I’ve sounded the bear horn on LEVI stock, over and over and over again.

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And ever since a first-day surge which pushed LEVI stock to $23, it’s been nothing but choppy declines for the stock. Today, LEVI trades hands below $20.

Reality check: that is exactly where LEVI stock deserves to trade today.

The logic  is overwhelmingly simple. LEVI isn’t a revolutionary growth company that’s changing the way people play, eat, or work. It’s a relatively boring, stable, low-growth, blue jeans company. As a relatively boring, stable, low-growth company, Levi Strauss’ earnings look poised to increase at a relatively low rate over the next several years. Considering the company’s relatively weak profit-growth prospects, LEVI stock doesn’t deserve to trade north of $20 today.

As a result, with LEVI trading below $20, the shares are exactly where they are supposed to be. I’d sell LEVI when it rallies above $20. I’d buy LEVI stock when it slides towards $17. But, here and now, I’d simply keep my eye on the stock.

LEVI Does Not Have Much Profit Growth Potential

Levi Strauss does not have much profit-growth potential.

When it comes to the blue-jeans market, Levi Strauss is about as good as it gets. But the blue jeans market is growing slowly. Consumers like blue jeans. They still wear blue jeans frequently. But they love “athleisure” clothing more. Moreover, the more consumers buy “athleisure” items like joggers, sweatpants, and leggings, the less they buy blue jeans.

That trend will persist for the foreseeable future. At the root of the “athleisure” trend is a non-cyclical jump in consumers’ desire to be healthy, fit, and active.

It’s tough to be active in blue jeans. Given that we live in a social-media-dominated world in which people are being viewed by their friends and family more often than ever, I don’t think consumers’ desire to be healthy, fit, and active will fade anytime soon.

As a result, the “athleisure” trend should remain robust for the foreseeable future, meaning that the blue-jeans market will keep growing slowly.

Levi Strauss won’t buck the broader blue-jeans trend. So, over the next several years, Levi Strauss’ revenues won’t climb by much more than 5%-10% each year.

Its margins won’t expand much over the next few years, either. That’s  because, given depressed demand for its products, LEVI won’t have much wiggle room to raise prices or cut back on its marketing spending. Indeed,  it may actually have to cut prices and spend more on marketing.

Overall, Levi Strauss’  top line appears poised to grow 5%-10% over the next several years, with limited margin increases. Ultimately, that means its earnings-per-share growth may max out around 10% per year. That isn’t enough to warrant a price tag above $20 for LEVI stock today.

Valuing LEVI Stock

Given that Levi Strauss’ profit will likely increase about 10% over the next several years, LEVI stock isn’t worth much more than $20 today.

The numbers are simple. Its EPS this year will likely come in around $1.06. Assuming LEVI’s EPS does grow at a 10% compounded annual growth rate into 2025, then its 2025 EPS will likely be around $1.90.

Based on a forward  price-earnings multiple of 16, which is average for the market, that implies a 2024 price target for LEVI stock of just over $30. Discounted back by 10% per year, that equates to a 2019 price target for LEVI of roughly $19.

The Bottom Line on LEVI Stock

I’ve been bearish on LEVI stock since Day 1. That’s because I’ve seen the stock as persistently overvalued, considering the company’s muted long-term profit-growth prospects.

Today, LEVI stock trades closer to fair-value territory than it has in awhile. As a result, it’s not likely to drop much. But LEVI probably won’t climb much, either.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities. 

Article printed from InvestorPlace Media, https://investorplace.com/2019/10/why-levi-stock-deserves-to-trade-below-20/.

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