One of Wall Street's biggest winners of the day is Tapestry, a apparel manufacturing company whose shares have climbed 4.3% to a price of $90.2 -- near its average analyst target price of $89.08.
The average analyst rating for the stock is buy. TPR outperformed the S&P 500 index by 3.0% during today's morning session, and by 111.9% over the last year with a return of 124.7%.
Tapestry, Inc. provides luxury accessories and branded lifestyle products in North America, Greater China, rest of Asia, and internationally. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Tapestry's trailing 12 month P/E ratio is 23.7, based on its trailing EPS of $3.8. The company has a forward P/E ratio of 16.7 according to its forward EPS of $4.76 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2024, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 20.93, and the S&P 500 has an average of 29.3. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand the strength of Tapestry's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2024 | 6,671,200 | 3,749,400 | 17 | -5.56 |
| 2023 | 6,660,900 | 3,542,500 | 18 | 0.0 |
| 2022 | 6,684,500 | 3,474,600 | 18 | 5.88 |
| 2021 | 5,746,300 | 3,113,900 | 17 | 254.55 |
| 2020 | 4,961,400 | 3,312,400 | -11 | -178.57 |
| 2019 | 6,027,100 | 3,234,000 | 14 |
- Average operating margins: 12.2 %
- Average operating margins growth rate: 4.0 %
- Coefficient of variability (lower numbers indicate less volatility): 1270.55 %
Tapestry's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2024 | 1,255,600 | 108,900 | 1,146,700 | 44.97 |
| 2023 | 975,200 | 184,200 | 791,000 | 4.17 |
| 2022 | 853,200 | 93,900 | 759,300 | -37.13 |
| 2021 | 1,323,700 | 116,000 | 1,207,700 | 499.06 |
| 2020 | 407,000 | 205,400 | 201,600 | -61.1 |
| 2019 | 792,400 | 274,200 | 518,200 |
- Average free cash flow: $770.75 Million
- Average free cash flown growth rate: 17.2 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in TPR have received an annualized dividend yield of 1.6% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Tapestry's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 12, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 2.93 as of the third quarter of 2024.
With an average P/E ratio, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend, we can conclude that Tapestry is probably undervalued at current prices. The stock presents mixed growth prospects because of its strong operating margins with a stable trend, and an inflated PEG ratio.
