Columbia Sportswear currently trades at $55.31 per share and has shown little upside over the past six months, posting a middling return of 4.3%. However, the stock is beating the S&P 500’s flat performance during that period.
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Why Do We Think Columbia Sportswear Will Underperform?
Despite the relative momentum, we're cautious about Columbia Sportswear. Here are three reasons we avoid COLM and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Consumer Discretionary - Apparel and Accessories companies. This metric excludes currency movements, which are outside of Columbia Sportswear’s control and are not indicative of underlying demand.
Over the last two years, Columbia Sportswear’s constant currency revenue averaged 1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.
2. Free Cash Flow Projections Disappoint
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Over the next year, analysts’ consensus estimates show they’re expecting Columbia Sportswear’s free cash flow margin of 6.4% for the last 12 months to remain the same.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Columbia Sportswear’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Columbia Sportswear falls short of our quality standards. Following its recent outperformance in a weaker market environment, the stock trades at 16× forward P/E (or $55.31 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. We’d recommend looking at the most dominant software business in the world.
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