Is Now the Time to Dive Into YETI Shares?

In this segment from Industry Focus: Consumer Goods, host Vincent Shen and Fool.com contributor Asit Sharma wrap up a show on outdoor lifestyle equipment purveyor YETI Holdings (YETI -0.25%) with their opinions on whether shares are ripe for a current purchase, or simply worthy of a place on investors' watchlists. Grab your YETI coffee thermos and click below for a Foolish perspective on YETI shares.

A full transcript follows the video.

This video was recorded on Nov. 27, 2018.

Vincent Shen: I think that leaves us with these overall themes. They have a strong brand. They have this premium positioning. Their growth seems to be recovering from the pretty significant hiccup that they encountered in 2017. So, the question is, does it have that staying power? Or is this another single-focus company that is able to create a market and dominate it, has a status symbol sort of brand? When they encounter significant competition, is that going to erode their margins, hurt their market share, and hurt the momentum for the company? Are you a buyer?

Asit Sharma: My opinion is, don't buy this stock just Yeti, if I can make a bad joke, a lame joke.

Shen: [laughs] Oh, God! That's good! I hated it, but it was pretty good.

Sharma: [laughs] Thank you! This one needs some seasoning, a few quarters of looking at financials. Listeners, we've given this advice with a number of IPOs that we've discussed over the past couple of years. I think it's sound advice. When there's a really compelling company that you just have to get into, you can see all numbers soaring, market demand is shooting up, management's hitting everything, the company's going on all cylinders. This is not really one of those scenarios. To give you one key number, if you look at marketing spend, they spent about cumulatively $156 million between 2013 and 2017. $50 million of that was spent just in 2017. That tells me that this relationship between needing to market and generate sales with an acceptable margin is questionable, perhaps. I would wait a few more quarters and look at that marketing expense as a total of sales. That will give you an indication of many of the pieces that Vince has talked about why this might not be a fast-moving company out of the gate after its IPO. My opinion is wait on it. Look at these next couple of quarters. It's really very close to the situation it had in 2017, which it's still recovering from. I say wait. There's no hurry to buy this. Buy one of their products, enjoy it at the beach in the meantime. What about you, Vince?

Shen: That's our usual disclosure that we have when we talk about IPOs, especially when it's soon after the company has priced. Some listeners, I'm sure, are probably getting sick of hearing this kind of cautionary advice that we give. But with any new public company, I think it's smart to give them at least six months, maybe a year, to get their footing, release some quarterly results. Even get a feel for management during their earnings calls, how they present the results, respond to analyst questions, how much they disclose and how transparent they are with that kind of information. Thinking about all that before taking a position.

I was looking at the current trading level, about $17 per share as of this recording. That puts the company trading at over 40X trailing earnings. First half of 2018 saw 34% year over year top line growth, 73% adjusted EBITDA growth. It does explain why expectations are high. People are excited about the opportunity that the company brings.

Making my call now for Yeti, as fellow Industry Focus host Nick Sciple put it once, I'm neither overwhelmed nor underwhelmed. I'm just whelmed by this story. I love the branding and the tailwinds in some of these new target markets and new geographic markets, but we've also learned some pretty hard lessons over the years in consumer and retail for similar stories. I mentioned GoPro earlier, but you think about also Fitbit or Groupon, Blue Apron, even Under Armour, which had a pretty long, strong run. These companies soar on a nascent trend, on this brand prestige, but they start to stumble once they face more serious competition or the fad burns out. I still have to ask myself how many $500-1,300 coolers can the company sell? How many of those are people looking to buy? When you buy one, I can't imagine you replenishing this on a yearly basis. That gives me some pause. But I'm actually pretty excited to follow this company. I think there's a lot to support the story.

Any final thoughts from you, Asit?

Sharma: Look at the debt, as well. Earnings are coming out shortly. Take a look at the marketing expense in relation to sales, as I said, and look at that debt load, any changes to that, and any indications for management of where they want to be in terms of leverage. Those would be the two most crucial points, along with the usual color on where the company wants to expand and how well it's doing.