VF Corp. (VFC): Dressed for success

"Our confidence in this market is growing… albeit slowly;  the fundamental blocks are already in place for a market bottom, and the technical blocks seem to be following," says Jim Stack, who accurately forecast the  market downturn.

In InvesTech Market Analyst, he suggests, "We are now stepping up our allocation. The newest addition to our Model Portfolio is VF Corp. (NYSE: VFC)."

"VF Corporation is the world’s largest publicly held apparel manufacturer and distributor. It owns an incredibly diverse line of brands; including such well known names as Wrangler, Lee, North Face, Vans, and Nautica.

"With its heritage brands (Wrangler and Lee) serving as cash flow generators and adding stability to earnings, VFC has the freedom to pursue growth in its key outdoor lifestyle businesses (Reef, North Face, etc.) and with bolt-on acquisitions which can be leveraged through its massive distribution channel.

"Diversity of brands also helps temper the cyclicality of VFC, with its heritage brands –which account for roughly half of annual revenue– functioning as quasi-staple products.

"While many other apparel manufacturers are putting growth on hold, VFC is continuing to add company owned stores, which sell only VFC products and provide diversification to the traditional chain retail outlets, as well as higher margins (i.e., a better bottom line). 

"Part of the reason VFC enjoys the freedom to focus on growth at this time, and why it meets our 'safety-first' criteria, is a remarkable financial discipline. 

"Despite occupying a sector that, by definition, cycles with the market, VFC maintains a healthy balance sheet with manageable debt and consistent cash balances.

"Also, thanks in part to the heritage product lines, VFC throws off enough free cash flow annually to repurchase roughly 8% of outstanding stock at current prices.

"What that means to us is, even without any growth in revenues, VFC should be able to earn a return of 8% by standing still (assuming management deploys cash prudently).  In our minds, that is a great start!  

"As an added bonus the company believes in returning a healthy portion of its free cash flow to shareholders in dividends.

"Currently, the company is paying a $2.36 per share annual dividend – equivalent to a yield of 3.6%.  This yield is well above the general market, and amazingly, approaches the yield of the 30-year Treasury bond (3.7%).

"Beyond the great yield, VFC’s long standing commitment to shareholders is evidenced by the 12.2% annualized dividend growth rate over the past 35 years.

"In addition to VFC being a well run company, we also view current valuation levels as an attractive entry point.  All of the major multipliers (Price-to-Earnings, Price-to-Cash Flow, Price-to-Sales) are sitting at levels not seen since the end of the 2000-2002 bear market.

"The stock presents a compelling opportunity in terms of attractive sector positioning, growth potential, financial stability and valuation."