| Quarterly (USD million) | 2012-10-31 | 2012-07-31 | 2012-04-30 | 2012-01-31 | 2011-10-31 |
|---|---|---|---|---|---|
| Revenues | 628.8 | 635.4 | 579.3 | 775.8 | 642.8 |
| Revenue Growth % | (1.0) | 9.7 | (25.3) | 20.7 | (5.1) |
| Net Income | 36.6 | 42.6 | 26.5 | 95.2 | 65.7 |
| Net Income Growth % | (14.0) | 60.9 | (72.2) | 44.7 | 9.3 |
| Net Margin % | 5.8 | 6.7 | 4.6 | 12.3 | 10.2 |
| ROE % (Annualized) | 13.6 | 15.2 | 9.0 | 31.8 | 22.0 |
| ROA % (Annualized) | 8.6 | 9.7 | 5.7 | 20.5 | 14.3 |
Valuation Drivers
Guess? Inc.’s current Price/Book of 2.1 is about median in its peer group. The market expects less growth from GES-US than the median of its chosen peers (PE of 11.4 compared to peer median of 22.4) and for its current rates of return that are around peer median (ROE of 17.3%) to decline.
The company attempts to achieve high profit margins (currently 7.7% vs. peer median of 6.4%) through differentiated products. It currently operates with peer median asset turns of 1.5x. GES-US’s net margin is its lowest relative to the last five years and compares to a high of 11.5% in 2011.
Economic Moat
Changes in the company’s revenues are in-line with its peers (annual revenue changed by 8.1%) but its earnings performance has been better — its annual earnings changed by -8.1% compared to the peer median of -16.6%, implying that it has better cost control relative to its peers. GES-US currently converts every 1% of change in revenue into -1.0% of change in annual reported earnings.
GES-US’s current return on assets is around peer median (11.1% vs. peer median 11.1%). This contrasts with its higher than peer median return on assets over the past five years (17.2% vs. peer median 8.4%), suggesting that the company’s relative operating performance has declined.
The company’s gross margin of 43.4% is around peer median suggesting that GES-US’s operations do not benefit from any differentiating pricing advantage. In addition, GES-US’s pre-tax margin of 11.6% is also around the peer median suggesting no operating cost advantage relative to peers.
Growth & Investment Strategy
While GES-US’s revenues growth has been above the peer median (8.7% vs. 1.9% respectively for the past three years), the stock’s PE ratio of 11.4 is less than the peer median. This implies that the company’s earnings are peaking and the market expects a decline in its growth expectations.
GES-US’s annualized rate of change in capital of 13.4% over the past three years is higher than its peer median of -1.4%. This investment has generated an above peer median return on capital of 25.6% averaged over the same three years. Evidently, the relatively high capital investment was successful given the relatively strong growth in its returns.
Earnings Quality
GES-US has reported relatively strong net income margin for the last twelve months (7.7% vs. peer median of 6.4%). This strong margin performance was accompanied by a level of accruals that was around peer median (4.2% vs. peer median of 4.2%) suggesting that the reported net income is supported by a reasonable level of accruals.
GES-US’s accruals over the last twelve months are positive suggesting a buildup of reserves. However, this level of accruals is also around the peer median and suggests the company is recording a proper level of reserves compared to its peers.
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Disclaimer
This article was originally written by abha.dawesar, and posted on CapitalCube.
