2023-11-13 18:15:23 ET
Summary
- YETI stock may be undervalued by 30% based on its earnings outlook.
- With recall woes in the past, market sentiment is improving for YETI which may attract once side-lined investors.
- If YETI were to re-up its share repurchase program for the long-term, it could bolster EPS and drive further share price appreciation.
As I set out to write this article, I fully intended to place a HOLD rating on shares of YETI Holdings, Inc. ( YETI ). This would've been a downgrade from my previous BUY rating issued in July 2022. The stock is down around 11% since then.
But as I listened to YETI's Q3 2023 earnings call, and considered its current valuation near $41 per share ($3.56 billion market cap), I changed my mind.
Based on its earnings outlook for 2024 and beyond, coupled with the fact its recall woes are in the rearview, I think YETI shares may be around 30% undervalued.
In this article, I'll make a case for why this maker of drinkware, coolers, and equipment has greater potential to the upside than down.
Catalysts For Price Appreciation
1) Improving Market Sentiment
As famed investor Benjamin Graham used to say, Mr. Market is a bit of a manic-depressive. He swings from moments of euphoria to moments of severe depression, sometimes within a single trading day.
So, when a public company issues a voluntary product recall due to a safety related concern, how would you expect Mr. Market to behave? Not good, and in YETI's case that meant a 30% drop in share price.
This cloud of pessimism and uncertainty has surrounded YETI for much of 2023. And it was warranted, in my opinion, because who could predict the impact to earnings or brand reputation?
Fortunately, YETI's product recall woes appear to be a thing of the past. And investors, such as myself, are feeling a bit more optimistic because there's a lot less uncertainty surrounding its overall impact.
In YETI's updated 2023 full-year guidance, the company disclosed a 5% impact to top line revenue as a result of the product recall, which included a stop-sale of its popular soft-cooler line.
But YETI re-introduced the soft cooler line back into the market in early Q4, as shared by CEO Matt Reintjes in the Q3 2023 press release . So what was a headwind in 2023 may prove to be a tailwind in 2024.
It's for these reasons I believe market sentiment is improving, which may attract larger institutions to once again fall in love with YETI, driving share price appreciation.
2) Growth, Albeit Tempered
In Q3 2023, YETI's revenue was flat YoY, but the company guided to 10% growth in Q4 which is in-line with its long-term growth algorithm. Here's an excerpt from CEO Matt Reintjes during the earnings c all :
"Looking specifically at the fourth quarter, this updated outlook implies approximately 10% sales growth which puts us back in the range of our long-term growth algorithm. This includes more balanced category growth between Drinkware and coolers and equipment supported by new innovation in Drinkware and the launch of our soft cooler products impacted by the recall back into the market."
A long-term growth outlook of 10% isn't all that impressive, in my opinion. Especially, when considering YETI compounded revenue at 15% the previous 5 years. But it is growth, nonetheless, and I think it'll come from 3 primary channels:
- International expansion, which is up 20% YoY and accounts for 16% of total revenue.
- Tempered domestic expansion, driven by a new partnership with Tractor Supply Company ( TSCO ).
- New product innovation, especially customization (i.e., name and/or logo on mugs, bottles, coolers, etc...).
3) Share Repurchases
In my opinion, YETI is nearing the point where it may make sense to allocate greater capital to share repurchases than reinvestment for growth. And I'd be in favor of such a decision.
As stated above, YETI's long-term growth outlook is 10%. And if I assume earnings grow at a similar clip, that's in line with returns one may receive owning a S&P 500 index fund or ETF ( SPY ), which comes with a lot less risk.
I believe a longer-term share repurchase program at YETI would drive EPS growth and shareholder returns above that of the index. 10% organic growth in EPS plus 5% growth from share repurchases would put YETI back in the 15% CAGR range.
Plus, YETI has shown a willingness and ability to execute a share repurchase program as evidenced by its repurchase of $100 million shares in Q1 2022 . But as of this writing, YETI doesn't have an authorized share repurchase program.
Bear Case
Every few weeks or so, I seem to find myself at a DICK'S Sporting Goods, Inc. ( DKS ). I did so recently, and couldn't help but notice the insane amount of shelf space, floor space, and sheer quantity of YETI products on display.
Some may believe this is a good thing, but I can't help but think, "this is way too much." So a part of my bear case for YETI is that the US market is just too saturated. I mean, how many shapes, colors, sizes, etc... of YETI mugs or coolers does someone actually need?
Secondly, if the US macroeconomic environment continues to deteriorate (which currently accounts for 84% of YETI's revenue), and the market truly is saturated with YETI products, that won't be a good recipe for shareholder returns.
Valuation
One rule of thumb amongst investors which I think is a good gauge on valuation, is the belief a stock's P/E should be 2x the company's long-term annual EPS growth rate.
Based on current Analysts' estimates, YETI's EPS CAGR is 10%, which is in line with what the company has shared with Wall Street. Based on this approach, a reasonable P/E for YETI is 20x (10% annual EPS growth x 2), which is well below its 5-year non-GAAP average of 27x.
The consensus 2024 EPS estimate amongst the 16 Analysts covering YETI is $2.69. So $2.69 multiplied by a 20x P/E gives a fair value of $53.80, which offers about 31% upside from here.
Conclusion
In my opinion, YETI is a solid company that's attractively priced at current levels. Its recall woes are a thing of the past, and improving market sentiment has the potential to boost share price appreciation if the company executes its strategy.
I think YETI's years of mid-to-high double digit revenue growth are a thing of the past. But if the company is able to hit its long-term target of 10% per year, shares seem too cheap. And if the company were to re-up its share repurchase program for the long haul, returns would be bolstered all the more.
At $41 per share, I'm a buyer.
For further details see:
YETI: 3 Catalysts For Share Price Appreciation