Yeti Holdings (YETI) produces and retails products for the outdoor and recreation market. The company appears to have solid growth catalysts and effective management. However, we are currently neutral on the stock.
Growth Catalysts
Yeti has developed a reputation for producing high-quality outdoor products. As a result, it has built up a social media following of 1.7 million on Instagram. This is very impressive for a company that’s mostly known for coolers, bags, and drinkware.
Such a loyal following makes it easier for Yeti to successfully introduce new products since these consumers are likely to be ready to buy. The strong media presence also makes it easier to transition a larger percentage of the sales mix to its direct-to-consumer (DTC) channels.
In fact, this is exactly what Yeti has done. In 2015, only 8% of its sales came from DTC, whereas 92% came from wholesale. However, in the last 12-month reporting period, 55% came from DTC, with the rest coming from wholesale.
Another growth catalyst for the company is international expansion. Currently, only 9% of its revenue comes from international customers. If Yeti can replicate its success abroad, it would continue to see strong double-digit growth for a while.
Effective Management
Great companies often have great management teams who can effectively allocate capital to profitable projects. Many professional fund managers tout the importance of meeting with a company CEO in order to gauge if that person is right for the job.
However, we may be able to get a good picture of management’s effectiveness by simply looking at the numbers. A metric we like to look at is the economic spread which is defined as follows:
Economic Spread = Return on Invested Capital – Weighted Average Cost of Capital
The idea is very simple; if the return on invested capital is greater than the cost of that same capital, then the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value and would be better off simply investing money into risk-free bonds.
For Yeti, the economic spread is a follows:
Economic Spread = 35.6% – 9.5%
Economic Spread = 26.1%
As a result, the company is creating value for its shareholders, implying that management is efficiently allocating capital.
Risks
A short-term risk investors might face is that the stock is currently in a downtrend. This might cause some pain for investors who don’t like volatility if the trend continues.
Alternatively, a longer-term fundamental risk to the company could potentially be international expansion. It’s possible that Yeti might not see the same level of success in foreign markets. However, there is currently very little reason to believe that management will not be able to successfully expand internationally.
Wall Street’s Take
Turning to Wall Street, Yeti has a Moderate Buy consensus rating, based on eight Buys and three Holds assigned in the past three months. The average Yeti price target of $112.45 implies 49% upside potential.
Final Thoughts
Yeti has a reputation for producing high-quality products and has built a loyal following. Management appears to be effectively allocating capital, and the operational risks don’t appear to be too concerning at the moment.
Nonetheless, we remain neutral because the stock is currently in a downtrend and would prefer to see a clear trend reversal.
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