This Legendary Canadian Stock Is Way Too Cheap to Ignore

Canada Goose Holdings Inc (TSX:GOOS)(NYSE:GOOS) remains one of the most iconic companies in Canada. After a recent pullback, shares are too good to pass up.

| More on:
Lady making handwritten notes next to a computer

Image source: Getty Images.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Legendary stocks often attract a hefty premium due to their historical success and name recognition. Every once in a while, however, these stocks go on sale. The reasons behind each drop vary, but they all deserve careful consideration.

One such legend is Canada Goose Holdings Inc (TSX:GOOS)(NYSE:GOOS). Founded in 1957 in Toronto, more than 5% of Canadians now own a Canada Goose jacket. That’s downright amazing. Take a look at any other fashion brand in history and you’ll rarely find a company with this level of domestic success.

In 2017, the company went public. Over the next 18 months, shares nearly quadrupled. The last 12 months have been a different story, however, with shares losing around one-third of their value.

Once one of Canada’s most expensive stocks, this growth company is now trading at bargain valuations. Plus, international growth could push profits to record levels in 2020. Now looks like the time to strike.

An incredible business

Despite the pullback, Canada Goose continues to fire on all cylinders.

Over the next several years, management wants to surpass 20% annual sales growth, hitting $1.4 billion in sales by 2022. EPS is expected to grow by at least 25% per year, hitting $2.66 by 2022. Judging by the data, both of these milestones should be achievable.

Let’s start with sales growth. In 2019, sales in Canada and the U.S., which constitute roughly two-thirds of current sales, grew by 28% and 36%, respectively. These are more mature markets, so trending toward the 20% per year growth mark seems reasonable.

The biggest growth, however, should come internationally. Canada Goose is only now establishing a presence in lucrative markets like Japan, South Korea, and Europe, not to mention the largest luxury market in the world, China. This year, international sales grew by an astounding 61%.

Growth in these regions is still in the early stages, so breakneck speeds should continue through at least 2022. In light of this, management’s 20% annual sales growth target seems way too conservative.

Now, let’s move to profitability. In 2017, gross margins stood at 52.5%. In 2018, margins rose to 58.8%. This year, they rose yet again to 62.2%. By comparison, competitor VF Corp has gross margins of 52%.

Rising profitability has been fuelled by a direct-to-consumer (DTC) strategy, which circumvents retail middlemen, eliminating the need for wholesale pricing.

In 2017, wholesale revenue was $289 million. Over the last two years, wholesale revenue increased to $399 million. Retail partnerships are therefore still strong and growing, but it’s the DTC strategy that has taken off. In 2017, DTC sales were just $115 million. This year, they were $431 million.

Accelerating DTC sales helps Canada Goose control the customer experience, gain valuable data, boost margins, and accelerate top-line growth. Most important, it proves that its products are still in high demand, even without a third-party retailer validating the brand.

As cheap as it gets

Using management targets, Canada Goose should generate EPS of $2.66 in 2022, which means shares currently trade at just 19.7 times 2022 earnings.

If the stock can maintain its current 30 times trailing earnings valuation, a deep discount compared to previous years, there would be 50% upside over the next 24 to 36 months.

Yet as we’ve proved, management’s expectations are likely overly conservative. It looks reasonable to expect EPS of $3.00 by 2022. At that rate, shares would have 70% upside.

No matter how you slice it, this is an incredible business trading at a bargain valuation. Canada Goose should be at the top of your 2020 buy list.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Canada Goose Holdings. Fool contributor Ryan Vanzo has no position in any stocks mentioned. 

More on Investing

Stocks for Beginners

Investing Strategies for Canadians in an Uncertain Economy

These are uncertain times, as the economy grapples with high inflation. Here are four investing strategies for the current market.

Read more »

Tech Stocks

These 3 Cheap Stocks Would Be an Excellent Addition to Your Portfolio

Given their attractive valuation and solid growth potential, these three stocks would be an excellent addition to your portfolio.

Read more »

money cash dividends
Dividend Stocks

TFSA Passive Income: 2 Top TSX Dividend Stocks to Buy on the Correction

These top dividend stocks look cheap to buy right now for a TFSA focused on passive income.

Read more »

Stocks for Beginners

How to Start Investing in a TFSA in a Down Market

Are you interested in starting a TFSA during a down market? Here are a few tips to keep in mind.

Read more »

Gold bullion on a chart
Metals and Mining Stocks

Is Barrick Gold Stock a Hedge Against Inflation?

Barrick Gold is among the largest gold mining companies globally. Is the stock a good bet amid rising inflation rates…

Read more »

Make a choice, path to success, sign
Stocks for Beginners

TFSA Investors: Must-Have Stock Strategies for Your Retirement

While reliable income stocks could help TFSA investors reduce their risk profile, high-growth stocks have the potential to significantly multiply…

Read more »

Happy diverse people together in the park
Stocks for Beginners

3 Stocks New Investors Should Buy Today

The stock market has been hard to gauge for the past year or so. Which stocks should new investors be…

Read more »

Growing plant shoots on coins
Tech Stocks

Market Correction: Don’t Miss These TSX Growth Stocks

Long-term investors shouldn’t miss this correction to accumulate top TSX growth stocks at prices well below their highs.

Read more »