Buy Long On Lululemon Athletica Inc.

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Lululemon Athletica Inc. (LULU) is a specialty retailer and designer of athletic apparel for women. The firm specializes in yoga-inspired merchandise but is branching out into new categories, including General Fitness and Men’s Apparel. The healthful lifestyle-inspired athletic apparel is sold through corporate-owned and operated retail stores, direct to consumer through e-commerce, through independent franchises, and through a network of wholesale accounts.

Lululemon Athletica (NYSE: LULU) stock closed yesterday’s trading session at $75.52. In the past year, the stock has hit a 52-week low of $41.70 and 52-week high of $81.09. Technical indicators for the stock are bullish and the company produces strong fundamentals.

GROWTH AND BALANCE SHEET

Lululemon’s customers are typically high-income women who are relatively insulated to prices and downturns in the economy. The company’s annual earnings growth rate over the past five years of 83.40% shows the strong growth for the company. LULU’s EPS growth for quarter over quarter is an impressive 50% up. Growth in the company’s revenue appears help boost the earnings per share.  The company has a net profit margin of 18.59%. The total Debt/Equity of 0% exhibits strong financial position. This means almost any cash it brings in can be used for dividends or expansion. Conversely, the current and quick ratio of LULU are remarkable at 8.05 and 6.38 respectively.

VALUATION

LULU has a market cap of $10.88 billion. The P/E of 50.68 is above the industry average, but the growth of the firm even in a bad economy is very promising for the future. The stock is currently trading above its fair value of $62. The beta of 1.8 implies high volatility of the stock with respect to the S&P 500.

RECOMMENDATION for next 6 months:

We initiate our coverage with BUY. The company has demonstrated a pattern of bullish technical signs and strong fundamental performance. The yoga clothing maker from Vancouver has impressive revenues and tremendous growth potential. Shares are up 61.89% year to date as of the close of trading yesterday.

For trading we suggest a long call at $80 for the December expiration.

NEWS and CALENDAR

Friday, September  7, 2012 – Lululemon Athletica Inc. (LULU) announced that for the third quarter of fiscal year 2012, it expects net revenue to be in the range of $300 million-$305 million based on a comparable-store sales percentage.

Monday, August 13, 2012 – UBS lowered the price target on Lululemon from $86 to $80

Friday, June 8, 2012 – Jefferies Cuts PT to $73 on Lululemon Athletica on Valuation Concerns

LULU Strengths

• Robust revenue growth
• Synonymous in customers’ minds with quality
• High margin clothing
• Global market leader

LULU Weakness

• Higher price than competitors
• Not enough expansion

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

LULU’s intrinsic value is $62.00 the current price is $75.52 that makes the stock overavalued.

Financials

We evaluate all the financial ratios of the company to determine financial health.

Sentiment

This is the investor’s sentiment for the stock.

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

Each year’s EPS numbers should be better than the previous year’s. One dip is allowed, but the following year’s earnings should be a new high. The financial health of the company, the higher the better, LULU’s annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.23, 0.28, 0.41, 0.85, 1.27. This type of earnings action is very impressive.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% nor should it be less than the average Debt/Equity for its industry.

The financial health of the company, the higher the better, LULU’s Total Debt/Equity of 0% is well bellow our acceptable level.

Quarterly EPS Change Quarter Over Quarter

The EPS growth for this quarter relative to the same quarter last year should be above the minimum of 18% for this model to consider good growth for the company.

The financial health of the company, the higher the better, LULU’s EPS growth quarter over quarter is 50% and is well above our target.

Annual Earnings Growth

This model looks for annual earnings growth above 12%, but prefers higher than 20%.

The financial health of the company, the higher the better, LULU’s annual earnings growth rate over the past five years is 83.40%. The company exhibits a solid increase in earnings over the past five years.

Current Price Level

Traders should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

The financial health of the company, the higher the better, LULU’s 52 week high is $81.09 current price is $75.52 only 7% below the high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be moderate, which in this model states is not greater than 15. Stocks with moderate P/E are more defensive by nature.

The company has a P/E ratio of 50.68 compared to the average industry P/E  of 13.36. This is also well above the S&P 500 P/E ratio of 17.00. The financial health of the company, the higher the better, LULU passes this criterion with distinction.

Insider Ownership

When there is strong insider ownership such as 12% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own only 9.76% of The financial health of the company, the higher the better, LULU stock. Management’s representation is not large enough. This does not satisfy the minimum requirement, and companies that do not pass this test are less attractive.

Technical Analysis

We will assign a value using several technical indicators (MACD, RSI, MFI, OBV, position indicators) to forecast the trend of the stock for 6 and 12 months.

LULU stock is currently in an uptrend, the money flow index is bullish. Resistance is at $80.5 and our indicators overall give a bullish view on LULU.