Levi Strauss: The Right Fit for Your Portfolio?

11/22/2019 5:00 am EST

Focus: CONSUMER

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

A recent IPO caught our attention. It is a rare beast, indeed. It’s a multi-billion company that comes to market already generating profits and paying dividends, asserts growth and income expert Ian Wyatt, editor of High Yield Wealth

Levi Strauss & Co. (LEVI) was founded in 1853 and spent most of its 166 years in private hands. It first went public in 1971 but was taken private in 1985. It again floated another round of shares to the public in March.

The stage for the successful encore as a publicly traded company was first set in back in 2011 when Charles “Chip” Bergh was hired as CEO. Bergh had spent 28 years at Procter & Gamble (PG) and led the integration of P&G’s massive $57 billion acquisition of Gillette.

Levi Strauss was in dire need of someone of Bergh’s caliber. The brand had grown stale, as had the company’s fashion initiatives. Annual revenue peaked at $7 billion in 1997 and then tumbled to $4.1 billion within the next five years. From 2001 to 2010, annual revenue never exceeded $4.5 billion. 

Bergh went to work. He instituted various changes: modernizing the company’s e-commerce division and expanding overseas being most notable.  Levi Strauss has delivered six straight years of top- and bottom-line growth under Bergh’s guiding hand. Enterprise value has more than doubled.

The balance sheet has been strengthened. A billion dollars in debt has been eliminated. The cash account has nearly tripled over the past four years to $944 million. Operating cash flow has nearly doubled.

Fiscal-year 2018 was the strongest year financially in more than a decade. Revenue grew 13.9% year over year to $5.6 billion. Bergh is confident that the company can grow beyond the 1997 peak of $7 billion to hit $10 billion in annual revenue. Given Bergh’s track record, I wouldn’t bet against it. The company continues to track in the right direction.

Levi Strauss shares opened at above $22 when they debuted in March. Enthusiasm lifted the price to $24.50, but the shares have lost ground since. They trade near $17.75. The discount appears irrational relative to the outlook (positive) for the business. The discount lifts the starting dividend yield to 3.4%.

The shares trade at 15.2 times the $1.15 forward EPS estimates. The forward EPS multiple for the peer group average is 18.5 times EPS estimates. The dividend, when annualized, generates a 3.4% dividend yield. The yield is generous on its own. For a dividend initiator, the yield is princely.  

We like the outlook for Levi Strauss. We like its business. We see a core of stable business and top-line growth in under-penetrated markets (such as China) driving results for the next few years.

Levi Strauss’ earnings are at least deserving of the peer-group multiple, if not more. We like the potential for dividend growth. We expect the higher multiple to materialize sooner than later. 

Investors will eventually give Levi Strauss what it deserves — a higher share price. Our 12-month price target is $21.50. That’s 22% upside based on the market price today. Toss in the generous dividend and the total return clears 25%.

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