Time to Pick Up Shares of Fossil Group (FOSL)?

by Ryan Fitzwater, Director of Research, The Oxford Club

Shares of fashion accessory and watch maker Fossil Group (Nasdaq: FOSL) are up over 11% today after posting third-quarter earnings and sales that beat analysts’ estimates.

Fossil announced that profits climbed to $1.96 a share on sales of $894.5 million, a 10% increase over the same period last year. Analysts had estimated sales of $877.8 million and earnings per share (EPS) of $1.82.

The surge in revenue can be attributed to a 12% increase in watch sales and a 23% jump in jewelry sales. Fossil also announced a renewal of its licensing agreement with fashion juggernaut Michael Kors (NYSE: KORS) that will last for a decade. Something else investors are happy to chew on.

Getting Some Skin Into the Smartwatch Game

Fossil recently decided not to sit idly by while new watch technology breaks into the market. In September, the company announced a joint partnership with Intel (Nasdaq: INTC) to develop “wearable technology,” aka smartwatches.

Intel’s vice president and general manager of the New Devices Group, Mike Bell, stated "we are focused on identifying trends and emerging uses of technology and accelerating wearable technology innovation worldwide."

Smartwatches are popping up all over the place from tech giants such as Sony (NYSE: SNE), LG (NYSE: LPL) and Apple (Nasdaq: AAPL).

According to Citi Research, the smartwatch market is set to soar over the next four years. It forecasts that demand for devices will increase five-fold over that time, from around $2 billion in 2014 to $10 billion in 2018.

If Fossil wants to keep its current watch market share, as well as grow it, it knows it needs to get in the smartwatch game. Its partnership with Intel is a smart move in the right direction.

Time for a Deal?

As you can see in the chart below, Fossil has had a rough ride in 2014.

As of yesterday, shares were down 13.5% for the year.  But with this quarter’s positive results, renewal of an important licensing contract with Michael Kors and the partnership with Intel to get into the smartwatch game on the horizon, Fossil’s future seems brighter.

This is a perfect time to check the pulse of Fossils financial health with our Investment U Fundamental Factor Test. Let’s see what type of rating it shakes out after we run it through the fundamental gauntlet.

Earnings-per-Share (EPS) Growth: We already know that Fossil beat analyst’s EPS estimates this quarter. That beat was also a 23.9% increase in EPS over the same period last year. Double-digit profit is always welcomed with open arms.

Price-to-Earnings (P/E) Ratio: Fossil’s P/E of 14.86 is well below the industry average of 23.31. Discount shoppers should be very happy with this metric.

Debt-to-Equity Fossil has a debt-to-equity ratio of 64.82%, which is almost half the size of its peer average of 123.94%. It is definitely not overleveraged on an industry basis.

Free Cash Flow per Share Growth : The winning streak ends with free cash flow. This quarter, Fossil saw free cash flow per share drop 18.89%. I just noted that the company isn’t over leveraged; it can easily afford the drop in free cash flow.  But hopefully it can turn on the cash faucet with the holiday season approaching.

Profit Margins Fossil’s profit margins of 11.59% are more than double the industry average of 4.82%. Big check mark here.

 Return on Equity : And Fossil closes out our last metric with a big bang. Its ROE of 37.28% is 10 times the industry average of 3.69%. Current and potential shareholders should be very happy with this metric.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

A: Strong Buy (Hits five or more key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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