V.C. Corporation just reported their Q3 earnings before the market open on October 24, 2016. The results of $1.19 beat expectations by $0.04. Also of note, the company announced it’s yearly dividend raise (43 years!) of 14% to $0.42 a quarter. The forward looking yield is roughly in the 3.2% range.
Shares are currently down in pre-market and I’ve been waiting for the stock to fall back to a reasonably valuation before considering purchasing. Upon further research however, I am going to hold off for further multiple contraction.
One of the things that I love about Fast Graphs is the ability to see how a company’s historical valuation. I think this is a much better measurement than trying to compare a company or industry against the market as a whole. There is a long trend in VFC’s history to trade around 15x earnings which is also, historically speaking, the multiple of the market. It’s only been in the past few years we have seen exception multiple expansion as the market rewarding growing earnings with even higher stock prices.
Now that earnings have slowed significantly since year end 2014, the stock, after surpassing any sense of reasonable valuation, those peaks are about 25x earnings, the stock has been pulled dramatically back towards it’s historical average. This phenomenon is known as mean reversion and there are countless examples of it.
Waiting For The Right Time
I am interested in owning the company, but I’m not crazy about the valuation. The recently raised dividend has my interest piqued but I will wait for the price to decline. Depending on if you are using TTM or full year earning expectations, paying a 15x multiple roughly puts my target price between $46-$50 a share.
Why don’t I just buy it you say? Although my aim is to hold the company long term – as I am a part owner in this business – I still am careful about how much I am willing to pay for future earnings growth and my cut – through dividends – of the company’s earnings. Paying too much will leave you as a bag holder and the initial purchase price is an enormous driving factor in future returns.
Lower Return Scenario
Let’s look at two scenarios and how your future returns would have played out. To start with, so you can see I am not cherry picking a time, here is how the graph looked back in 2007/2008.
The multiple the market paid for VFC was actually even lower during this time period, roughly at 13x earnings. So when the stock peaked through 2007, it was clearly overpriced at that point. I am using that as the setup for my next graphics.
In this example, let’s pretend we bought it in 2007. We’ll assume were caught up in the hype of a rising stock and plunked down our money to buy shares. We held them for many years and ultimately sold them in 2013 at the historical multiple of 15x earnings. We can see our annual rate of return, highlighted in yellow, is about 10% per year. Pretty great right? No doubt it is, especially as the country went through the Great Recession. We could have done substantially better just by buying when the market was not paying a great premium for the company’s earnings.
Higher Return Scenario
Had we bought when the company was trading at even under it’s lower 13x multiple (under 12x earnings). Again, if we sold at the same period we would have seen an annual return over 16%. This easily beat the market over the same time period.
I don’t get the fascination with high stock prices, high prices only benefit stock sellers. Like Warren Buffett wrote in his 2008 letter to shareholders:
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
By paying less at the time of purchase, especially during a time of undervaluation, we are able to buy more shares. This in turn let’s us collect more dividends with a larger margin of safety. Ultimately if we decide to, can benefit from periods of exuberance by selling at unreasonable or unwarranted valuations.