Fossil (FOSL), the watch and clothing company, popped from $75 to $87 yesterday. Today the stock hit $90.
Fossil stock is one we need to watch because it had been a huge winner since July 2010, going from $40 to a high of $125. Then the stock dropped hard as the company lowered earnings guidance due to margin pressure. Maybe the sell-off was too much, as there’s now strong support for the stock.
One Year Chart
Profit growth was flat last quarter, and next quarter looks weak too. FOSL had been posting some huge profit growth in the three quarters prior to last quarter. So for now, growth has slowed. Estimates for the next four quarters are 3%, 23%, 26% and 23%.
The trouble with Fossil is its a clothing manufacturer. These companies are weak during recessions as retailers deplete their inventory. Then when the economy turns up, retailers have to stock the shelves and place big orders for merchandise. Then specialty retailers profit handsomely.
Since retail has been booming for the last two years, things could slow down. Especially with a recession maybe on the horizon.
Fair Value
Fossil is a rapidly growing company. The expected Long Term Growth Rate is 22%. FOSL could be considered a 25% grower. But since this business is a little cyclical, I have to make the Fair Value P/E between 20 and 25. With the shares trading around $90 now, FOSL isn’t on sale that much.
Bottom Line
FOSL is a little undervalued. Next year there’s upside, but not enough for me to buy the stock. The negative is annual profit estimates just declined — for the next three years — and that’s not a sign of a true market leader. I’m going to pass.
View the earnings table here.
View the ten-year chart here.
