I'm Taking Up Playing Polo Again

Ralph Lauren (RL) is an "aspirational" worldwide brand with true market power.

Earnings and the shares both suffered in 2020 due to COVID-related retail store shutdowns and curtailment of travel. RL's recovery began in the quarter ended September of 2020 and has continued improving ever since.

Fiscal second-quarter results this year (quarter ended Sept. 30) handily beat analyst estimates. EPS came in at $2.57 vs. expectations for $1.99 and only $0.53 in the same period a year earlier.

The 29.1% positive earnings surprise marked the fifth consecutive quarter, which exceeded expectations. The average analyst underestimate was an astounding 80.78% over those five quarters.

What was even more amazing was that RL sold off sharply on this excellent report. As of 2:42 p.m. on Tuesday, the shares were hovering near $118, down about 9% on the day. My graphics were created with RL at $119.70 as of 1:18 p.m.

What is Ralph Lauren really worth?

Over the nine pre-COVID years from 2011 through 2019 RL fetched an average P/E of 18.1-times, accompanied by around 1.6% in current yield. All but one of RL's best buying opportunities (green-starred below) during that period came with the stock between 14.4-times and 16.5-times earnings.

Conversely, all six of RL's "should have sold" moments saw the stock ranging between 19-times and 23.6-times EPS. A simple regression to the mean valuations on fiscal 2021's new estimate justifies an end of March 2022 target price near $148. Reverse engineering RL's $2.75 annual dividend rate to a more typical 1.6% supports a rebound to over $171.

Note that RL peaked at from $182 - $192 during each of the four years 2012 through 2015 on similar earnings to what is now projected for fiscal 2022.

Yahoo Finance saw RL reaching $141.38 by this time next year. That was before Tuesday's better than expected news.

Clearly the Tuesday sell-off appears unjustified and should be treated as a buying opportunity.

LEAP puts are available for option writers willing to shoulder just a modicum of risk. I sold some Jan. 19, 2024 expiration at both $100 and $110 strike prices. Actual pricing, with RL at $119.70, are shown below.

Prices are even higher now that RL has dipped another $1.70 per share.

Worst-case, forced purchase prices dropped to either $83.70 or $88.90. That equated to margins of safety of 30.1% or 25.7% depending on the strike price employed.

Future stock market action can never be guaranteed. We can know for sure, however, that owning RL at either break-even point would have been a winning position 100% of the time dating back to before the start of 2021.

Ralph Lauren is a high quality, large-cap blue chip name. It pays a secure, better than CD rate, current yield.

I had great success trading in and out of RL over many years based on valuation fluctuations.

Ignore the crowd and the perennially pessimistic analysts. Buy some shares, sell some puts or consider doing both. 

At the time of publication, Price was short RL LEAP puts out to Jan. 2023 and Jan. 2024.