Levi's has been treading water for the past six months, recording a small return of 4.8% while holding steady at $22.06.
Is now the time to buy Levi's, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Levi's Will Underperform?
We don't have much confidence in Levi's. Here are three reasons you should be careful with LEVI and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
Investors interested in Consumer Discretionary - Apparel and Accessories companies should track constant currency revenue in addition to reported revenue. This metric excludes currency movements, which are outside of Levi’s control and are not indicative of underlying demand.
Over the last two years, Levi’s constant currency revenue averaged 5.1% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Levi's has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 8%, lousy for a consumer discretionary business.
3. 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).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Levi’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Levi's doesn’t pass our quality test. That said, the stock currently trades at 14.7× forward P/E (or $22.06 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
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