YETI

YETI Holdings, Inc.

46.42
USD
-2.09%
46.42
USD
-2.09%
38.77 108.82
52 weeks
52 weeks

Mkt Cap 4.15B

Shares Out 87.47M

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YETI Shares Have Become Surprisingly Cheap, Unlike Their Mugs

Summary While we would not be buyers of the company's products since we view them as overpriced compared to alternatives, we are impressed by the shares which seem surprisingly cheap. The company appears well managed, and with a solid balance sheet. There is a good margin of safety between our estimate of intrinsic value, and the current share price. It seems that in this environment, growth is the new value. You have to give credit to YETI (NYSE:YETI) in that they have managed to create a lot of "buzz" out of things that are normally kind of boring, such as mugs, thermos, and coolers. Below is an example of earned media with stories about the products, and it is not just the media that is excited about the products. Apparently, they have a lot of fans that are ready to pay top dollar for the products, many of which can be found with arguably similar quality at much lower price points. While we are not among those that get excited by their products, we have to admit that we are getting excited by looking at their growth. As we'll see, the company has been growing at an impressive pace, and currently one does not have to pay much for that growth. That said, what gives us some pause is the question of how many long-lasting coffee mugs and coolers one really needs, and if the company can keep growing beyond the early adopters and enthusiast, and into a more general public. Financials Revenue growth for YETI has been nothing short of remarkable, almost tripling from 2018 to 2022. What's more, this is profitable growth since the company is already making money, unlike many other growth companies. While growth has been impressive, it has been somewhat irregular, and maybe that is one of the things that scares some investors that value consistency. Still, a 28% average CAGR is no small feat, and the recent 18% growth is still quite decent. The company has been profitable for the last few years, with a solid 52% gross profit margin, and a respectable 11% operating margin. This is despite still being in growth mode, and spending significant amounts on new initiatives to capture a bigger slice of the opportunity, such as direct to consumer and international expansion. In addition to the solid profitability, the company has a good cash reserve and once the cash is considered the net total long-term debt is relatively small. Growth Opportunities YETI is busy working on several growth opportunities, from expanding the set of products it offers, to increasing the percentage of sales on its DTC channel. As seen below, the DTC channel is growing faster than the average net sales, and significantly faster than wholesale, which is still experiencing positive growth. Drink-ware is the star of the show growing at 24%, while coolers and equipment are growing at a more modest 10% rate. Where YETI has just started is in international growth, only ~10% of its revenues come from international markets, much less than other well-known consumer brands. It is getting started with Canada, Japan, Australia, New Zealand, the UK and the EU. If this succeeds, we can see YETI going after additional international markets, and we would not be surprised if at some point the international opportunity represents more than a third of sales. Valuation Shares have rarely been as cheap as they currently are, with an EV/Revenues multiple of only ~2.6x, and 2.2x for the forward version. While the historical low was during the COVID crisis, this was a period of extreme uncertainty. The valuation looks even cheaper when using EV/EBITDA, especially the forward version, which is close to company's historical low. Looking at the price/earnings ratio, it is basically the same story. With the trailing twelve months P/E at ~18x, and the forward ratio at only ~15x. To estimate the intrinsic value of the shares we did a simple discounted cash flow model, using analyst's estimates compiled by Seeking Alpha of earnings for the next three years, and 10% growth thereafter until FY 2030. We then used a GDP-like terminal growth rate of 3% and discounted everything at 10%. With these assumptions we get a net present value of $66.80 per share, which gives a nice margin of safety relative to where shares are presently trading. Terminal Value @ 3% terminal growth 103.26 39.81 2022 Outlook The outlook for FY 2022 shared by the company calls for net sales growth of 18-20%, about the same level it experienced in the most recent quarter. Adjusted EPS is guided to between $2.86 and $2.91, which is growth of 11-13%. Adjusted EPS growth is a little lower than sales growth, but still pretty decent in our opinion. So, what are the risks? The biggest one we see is that the products the company sells are the very definition of consumer discretionary. People do not really need a new coffee mug or brand-new shiny cooler; they buy them because they want them not because they need them. So, these are the types of products where people can easily reduce expenses if they lose their jobs or have financial difficulty during a severe recession. Fortunately, the balance sheet is quite strong with an Altman Z-score of 11.6, and significant amounts of cash & equivalents. There is a relatively high amount of short interest, we believe this is due to a combination of a previously high valuation and some investors betting against consumer discretionary companies. Still, we consider this a yellow flag and wonder if we are maybe missing something. Conclusion Unlike the products it sells, we believe YETI shares are currently a good deal. They are attractively valued on several measures, and with a good margin of safety relative to our discounted cash flow model. Investors should remember that this are discretionary products, so sales might suffer during the next recession. That said, the company still has many growth opportunities, including the expansion of the DTC channel and international markets. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling shares, you should do your own research and reach your own conclusion, or consult a financial advisor. Investing includes risks, including loss of principal. Comment

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