Over the past six months, Oxford Industries’s stock price fell to $36.28. Shareholders have lost 6.9% of their capital, which is disappointing considering the S&P 500 has climbed by 13.1%. This was partly due to its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Oxford Industries, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Oxford Industries Will Underperform?
Even with the cheaper entry price, we’re passing on Oxford Industries for now. Here are three reasons why there are better opportunities than OXM, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Oxford Industries grew its sales at a 11.6% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Oxford Industries’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.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Oxford Industries’s $592.4 million of debt exceeds the $9.36 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $105.5 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Oxford Industries could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Oxford Industries can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of Oxford Industries, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 13.2× forward P/E (or $36.28 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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