April 1, 2019

Analyzing Levi’s Potential as a Newly-Public Company

by Jharonne Martis.

The iconic American jeans brand, Levi Strauss & Co., has gone public for the second time – and investors will be watching to see if the company can extend its recent performance. It has experienced a rising sales growth rate for three consecutive years and last year recorded a 13.69% jump in revenue.

The IPO was priced at $17 per share and soared 32% on its first day of trading. We checked the intense discussions on social media and evaluated its investment profile.

In anticipation of the IPO, investors hit social media with a number of tweets to discuss the stock. Using our Refinitiv Eikon Social Media Monitor app, we are able to track investors’ opinions on Twitter when Levi’s ticker symbol ($LEVI) is mentioned in a tweet.

Twitter volume jumped on the first day of trading, March 21, ranging from 280 to 600 tweets an hour. Levi’s sentiment was mostly positive before and during its IPO. The stock is trading at around $22 per share, valuing the company at $8.9 billion.

Exhibit 1: Eikon Social Media Monitor – Levi’s

Source: Refinitiv Eikon

Checking fundamentals

We looked at several of the StarMine models to see if Levi’s looks like a healthy investment. We found that it ranks in the top percentiles of all companies in its region under StarMine’s Earnings Quality (EQ) model. The company’s operating efficiency component looks good, and cash and accruals look healthy.

Exhibit 2: StarMine Earnings Quality Model for Levi’s

Source: Refinitiv Eikon

Asset turnover picture

Levi’s earnings are backed by strong operating efficiency. From the graph below, it is evident that the operating asset turnover ratio has been on the rise. This suggests that the retailer is efficient in generating sales.

Exhibit 3: Levi’s Operating Asset Turnover

Source: Refinitiv Eikon

What does Wall Street say?

With StarMine’s Credit Risk – Text Mining model, we are able to analyze transcripts, Reuters news, filings and research to identify companies likely to experience default. The implied rating here is an AAA, and the overall model score is 65, placing the company in the top 40% percentile for companies within its region.

Moreover, the overall score on the company’s recent news transcripts is a healthy 82 out of 100, with five of the most recent documents ranking 10 out of 10. Those scores point to particularly bullish language used by news reporters.

Exhibit 4: StarMine Credit Risk – Text Mining Model

Source: Refinitiv Eikon

Stock value

So is this newly-public stock a good value? Our StarMine Intrinsic Valuation model accounts for the systematic biases that our research team found in sell-side estimates. Namely, the faster the expected growth rate, the more optimism bias. In addition, farther out estimates are more optimistically biased than nearer ones. The strong tendency of rapid growth rates to revert to the mean is frequently underestimated, which is especially problematic when attempting to value growth stocks.

For Levi’s, after adjusting FY1, FY2, FY3-FY5 and LTG estimates for optimism bias, StarMine’s Intrinsic Valuation model arrives at a forward 5-year compound annual growth rate (CAGR) of 9.2%, calculating fair value at $17.54/share, about two thirds of its current price level.

Exhibit 5: StarMine Intrinsic Valuation Model

Source: Refinitiv Eikon

Bright future?

Plugging in today’s price and solving for growth suggests that investors are optimistic. Levi’s market implied 5-yr CAGR is 12.2%. Perhaps Wall Street is expecting more magic from the jeans maker.

The competition

Meanwhile, VF Corp., which owns Lee and Wrangler, plans to spin off its jeans segments sometime this year. The new company’s name will be Kantoor Brands. However, when comparing sales, it is evident that their sales have been on the decline, and YoY growth has been contracting. As a percentage of total sales, jeanswear only accounted for 21% of VF Corp.’s total 2018 revenue. That is down from 22.48% the previous year. Meanwhile, Levi’s 2018 revenue grew 13.69%, an improvement from the 7.7% growth in the previous year.

Exhibit 6: VF Corp. Business Segment Revenue

Source: Refinitiv Eikon

Analysts’ sentiment

Analysts polled by Refinitiv are also less optimistic about VF Corp. compared to the previous two years. Moreover, Kantoor Brands would also be facing more competition from Old Navy, whose low-priced jeans are very popular. Old Navy’s parent company, Gap Inc., plans to spin it off as a publicly-traded company, so shares will soon be available in the value retailer. Still, jeans are always popular during the back-to-school season and it will be very telling to see which jeans maker wins the popular vote.

Exhibit 7: StarMine Analyst Revision Score Model

Source: Refinitiv Eikon


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