Ok, I dropped the ball not getting Lululemon (LULU) last year (or the year before). Now every time I evaluate the stock, it doesn’t seem like a great value.
One-Year Chart
This is today’s one-year chart. Yesterday after the market closed LULU said profits will come in at $0.57 next quarter, better than the $0.50 estimate so that +25% Estimate for next quarter is now expected to be+43%.
You see that jump LULU made in November? It jumped from $56 to $70? That move was made after earnings were announced. The company had great earnings in fact, the kind that dramatically increase a company’s value. So before the breakout (when the stock was in the $40s & low $50s) this women’s sportswear maker had a P/E of 35 to 45. Right now with the stock at $73 the P/E is 41 so the stock rose because annual estimates rose.
On 12/8 LULU closed at $56, then the company announced earnings the morning of 12/9 and LULU opened at $62. The company made a profit of $0.36, beating the $0.25 analyst estimate (my $0.24 estimate). Within a week the stock hit $70 — as analyst raised annual profit estimates during that week. In the winter of 2010 LULU kept growing along with annual estimates, the P/E was just keeping pace. So this story is now about Annual Profit Estimate increases — if this rises the stock has shown it will keep up.
Earnings Table
First you need to know this: the last time I updated my figures on LULU was 9/24/10 when the stock was $43. The P/E was 36 and profit growth showed +20%, 0%, 19% and 13% coming in the next four quarters. So the stock looked high.
Here’s the current Earnings Table, updated today. Analysts haven’t updated estimates yet to account for the beat that will take place next quarter, so this is kind of like LULU as of yesterday during market hours.
LULU’s P/E is 41 and growth looks like +25% +43%, +26%. +17% and +19% over the next four quarters. Once again, I don’t know whether I should buy the stock or now — the estimates continue to show slowing growth ahead.
The big deal here is the Annual Profit Estimates. If those continue to jump then the stock will too (if it can hold that 40 P/E). If not we could see a correction — and since this stock’s gone from $30 to $70 in the past year a correction could be strong.
Fair Value
In the Fair Value table there’s not much upside unless annual estimates increase — this stock is selling where it should. But if Annual Profit Estimates jump as they did last time, the stock will likely also jump to the new fair value without giving us much chance to get in.
Bottom Line
The bottom line is I still don’t know what to do about this stock. I’m leaning towards buying it because of the history of increasing estimates. What I really want is for the stock to pullback — say to 35 times earnings which is around $61 now — and then I will have an opportunity.
LULU is due to report on March 21. If the stock breaks out on high volume before then I’ll be inclined to purchase it.
