Levi's trades at $22.20 and has moved in lockstep with the market. Its shares have returned 10.1% over the last six months while the S&P 500 has gained 6.4%.
Is now the time to buy Levi's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Levi's Will Underperform?
We don't have much confidence in Levi's. Here are three reasons why LEVI doesn't excite us and a stock we'd rather own.
1. Weak Constant Currency Growth Points to Soft Demand
In addition to reported revenue, constant currency revenue is a useful data point for analyzing Consumer Discretionary - Apparel and Accessories companies. 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 7.3% 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. Cash Flow Margin Set to Decline
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.
Over the next year, analysts predict Levi’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 7.3% for the last 12 months will decrease to 4%.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared 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. Unfortunately, Levi’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
We see the value of companies helping consumers, but in the case of Levi's, we’re out. That said, the stock currently trades at 14.5× forward P/E (or $22.20 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are superior stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
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