3 Reasons You Should Consider Buying the Dip in Levi Strauss Stock Around $12

It’s been a rough year for retail stocks. Levi Strauss (NYSE:LEVI) is no exception to the trend. The $5 billion jeans maker has seen its sales, profits and the LEVI stock price all collapse in 2020 amid a global pandemic which has closed most physical retail locations and derailed consumer discretionary spending.

a stack of white t-shirts with the Levi's (LEVI) logo on them

Source: Papin Lab / Shutterstock.com

Through the first half of fiscal 2020 (the six months ended May 24), Levi Strauss’ sales have dropped 27% year-over-year. Adjusted operating margins have compressed more than 1,000 basis points. What was a near $300 million adjusted operating profit in the first half of fiscal 2019, has swung to an operating loss of $17 million this year.

And LEVI stock has plunged. By 40% year-to-date. To its lowest levels. Ever.

I think it’s time to buy the dip.

Here’s three big reasons why.

LEVI Stock Is Fundamentally Undervalued

Fundamentally, LEVI stock is fully priced for all the bad stuff happening today. But it isn’t priced for any of the good stuff that’ll happen in 2021/22 and after.

Sure, Levi Strauss isn’t selling a bunch of jeans today. Physical retail stores are closed. Consumer discretionary spending has fallen off a cliff. And who really needs a new pair of jeans in a world where we are staying in 80%+ of the time?

But today’s trying times won’t last.

A Covid-19 vaccine will significantly diminish the threat of Covid-19, and lay the groundwork for global society to normalize. People will leave their homes. Offices will open back up. Physical retail stores will open, too. Consumer discretionary spending will rebound. Apparel demand will recover.

All of this will happen in 2021/22. Against that backdrop, Levi Strauss will sell a lot of jeans. Revenue growth trends will sharply reverse course and rebound. Profit margins will recover to pre-pandemic levels. Profits will jump back to new highs.

At 1-times trailing sales and 14-times forward earnings, LEVI stock isn’t priced for this recovery.

So, when it happens, shares could fly higher.

How much higher?

My numbers indicate that Levi Strauss could do about $1.50 in 2025 earnings per share. Based on a market-average 17-times forward earnings multiple, that implies a 2024 price target for LEVI stock of over $25 — more than 100% above where shares currently trade.

Upside Catalysts on the Horizon

There are a few upside catalysts on the horizon for LEVI stock that could meaningfully improve investor sentiment and drive this undervalued stock higher.

First, above all else, there’s the Covid-19 vaccine news flow. This news flow has been overwhelmingly positive in recent months. I suspect it will continue to be overwhelmingly positive over the next few months, too. Each step we get closer and closer to a vaccine increases the visibility and likelihood of a 2021/22 rebound in Levi Strauss’ sales and profits.

Ultimately, then, continued favorable developments on the Covid-19 vaccine front should help improve investor sentiment into the end of the year. That’s especially true if, during that time, one of the vaccines scores FDA approval and starts being administered broadly.

Second, it appears that a second round of stimulus checks will go out to U.S. consumers in August. That’s good news for Levi Strauss because about 20% of consumers spent their first stimulus checks on clothing. This second round of checks could, then, provide a temporary boost to depressed second-half 2020 sales trends.

Third, Levi Strauss is a global company. Almost 50% of sales in 2019 were generated outside of the Americas. In those geographies (namely, Europe and Asia), the Covid-19 pandemic is under much better control, and those economies are in the process of normalizing. It’s quite likely that retail sales in Europe and Asia significantly recover in the second half of 2020, which will help lift Levi Strauss’ overall growth trajectory.

Technical Support

LEVI stock has strong technical support at the $12 level.

Shares have shown support around $12 multiple times over the past few months. First, in early May. Then, in mid-May. Then, in late June. And once again in early July.

That $12 level is also right around where former LL Bean CEO and current Levi Strauss Board Member Christopher McCormick bought roughly 3,800 shares of LEVI stock in late July.

In other words, the technicals imply that $12 is a bottom for LEVI stock.

Bottom Line on LEVI Stock

Admittedly, LEVI stock is a tough buy during the Covid-19 pandemic, especially with cases across the U.S. still spiking.

But it’s also the right buy.

LEVI stock is fully priced for all the bad stuff happening today, and not at all priced for any of the good stuff that’ll happen in 2021/22. The stock also has a few upside catalysts on the horizon (Covid-19 vaccine, stimulus checks and rebounding discretionary spend in Europe and Asia), and has shown strong technical support just below where shares currently trade.

The implication?

It’s time to buy the dip.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/07/3-reasons-to-buy-the-dip-in-levi-stock/.

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