Rule #1 Finance Blog

With Investor Phil Town

Rule #1 Question of the Week: PVH’s ROIC

Phil_town_138 This week's Question comes from Mitra, who references my mention of PVH on "The Millionaire Inside" on CNBC.

Q:

Phil Town,

Great book!  I really enjoyed reading it.  Because of you, I watched the program too… I have a question regarding PVH.  In your book, you said we should not buy any stock if the company's return on capital is less than 10.  I checked PVH.  These are the numbers:

Return on Capital 9.6
Return on capital (5 year) 6.3

Would you please clarify this for us too.

Thanks,

Mitra

A:

I am definitely getting taken to the woodshed about recommending a stock that has less than 10% ROIC.  I'm glad you guys are on top of this because ROIC is critical.  It's the single most important number to tell us that the management is using the resources of the business well and that they haven't become traitors by trading lower ROIC for size and power. 

So let's look at this shirt company – Phillips Van Heusen – to see what we think about this ROIC problem.

First glance at the long term numbers tells me that this company has been just slugging it out for years, until about 4 years ago – when it started to get traction and the numbers turned up solidly.  Before that they were not particularly interesting or, more importantly, not good enough to make any kind of prediction. 

The fact that these numbers are turning good so recently immediately should tell you that this business cannot be in our regular portfolio…  So if we want it, it's got to fit in the Risky Biz portfolio, like a Google.  The Risky Biz portfolio is where we take a bit of a risk.  This isn't license to take wild gambles…  It's just a place where we can fit in the occasional fun business that looks like it's really turning itself around.

Now go play!

Phil Town