Today’s News: Guess? (GES) reports great second quarter; moves from Strong Buy to Buy; moves from Buy Low Opportunities Portfolio to Growth & Income Portfolio.
Guess? (GES) reported a strong second quarter earnings beat yesterday afternoon, and the stock is up about 15% this morning. Analysts expected $0.32 EPS, and the market was surprised by $0.36 EPS. Revenue of $645.9 million slightly missed the estimate of $650.6 million.
Management projected full year revenue, adjusted operating margin and adjusted EPS numbers higher than their previous guidance, with a notable drop in expected currency impact. Analysts’ 2019 earnings estimates (January year end) were already higher than management’s projections, so I don’t necessarily believe that Wall Street’s 2019 EPS estimates will rise significantly from here, although 2020 estimates might certainly be bumped up.
Several analysts raised their price targets on the stock. The Cowen & Co. analyst cited “improved merchandising, marketing and in-store execution”. The Jefferies analyst cited “Americas and Europe momentum”.
From the press release:
Victor Herrero, Chief Executive Officer, commented, “I am pleased to report that our second quarter results finished above the high-end of our expectations for adjusted operating margin and adjusted earnings per share. I am very encouraged by the trends in our Americas Retail business where we posted another quarter of positive comps and expanded our operating margin. Looking forward, I feel confident that the ‘turnaround’ has only just begun, as we are well positioned to exit this fiscal year with every business segment profitable and the Company firmly on the path to our 7.5% operating margin goal by continuing to execute on our strategic initiatives.”
I have frankly been more bullish on the stock than most of Wall Street. Earnings growth projections have been very strong, the P/Es have been relatively low for a stock with such aggressive earnings growth, the dividend yield is much higher than you ever see on a growth stock, and the debt-to-cap ratio is ridiculously low.
GES joined the Buy Low Opportunities Portfolio on June 1 at an average price of 19.875 after a stunning and unwarranted share price drop. The stock has now retraced its 2018 high of about 26. If you were in GES for a short-term trade, it’s probably time to sell. But because this stock still presents incredible value, I’m keeping GES and moving it to the Growth and Income Portfolio, and also ratcheting the recommendation down from Strong Buy to Buy for a little while.
Here’s what the share price is most likely to do next—and of course, I could be wrong. Typically when a stock retraces its previous/recent high, especially on a big burst of energy like we saw today, the stock pulls back and rests for a short while before rising again. It occasionally holds the new price level and trades sideways for a couple of months, like we recently saw with Universal Electronics (UEIC), and on rare occasions it immediately keeps rising. In that light, if you’re gambling for a pullback, go ahead and sell today and be prepared to buy back below 24, because any pullback is likely to be brief.
If you haven’t previously owned GES, you should feel confident buying on any pullback, as long as you have a good tolerance for the common level of volatility that’s associated with small-cap stocks.
That’s all for now. If you bought GES in June, congratulations! At 26.25, it’s up 32% since joining the portfolio. If GES gets anywhere near 34, where it last traded in 2010, I will sell. Buy.