Fossil Is Approaching A Key Sales Inflection Point

KeyBanc Capital Markets has upgraded Fossil Group Inc FOSL to Overweight as it believes the watch maker is approaching a key sales and earnings inflection point, thanks to the strong reception of new wearables such as Rose Gold KORS Bradshaw and the Gunmetal (Smoke) FOSL Marshal.

“We now believe that wearables can drive $175 million–$225 million in rev, which could drive $0.50+ in EPS,” analyst Edward Yruma wrote in a note.

Within The Wearables Universe

Among peers, the brokerage expects Fitbit Inc FIT to generate $2.4 billion in revenue and estimates Apple Inc. AAPL to rake in $4.3 billion in Apple Watch sales.

Meanwhile, Yruma expects the underappreciated Fossil and Skagen lifestyle brands to drive $1.3 billion in revenue and lower costs should offset higher wearables spend.

Yruma raised his 2016 EPS estimate to $2.05 and projects wearables could be a $1 billion plus opportunity over the long term.

Fossil Valuation

On the valuation front, the analyst said Fossil shares trade at 0.7x EV/sales. Other branded accessory peers such as Coach Inc COH, Kate Spade & Co KATE, Michael Kors Holdings Ltd KORS and Vera Bradley, Inc. VRA trade at an average multiple of 1.6x EV/sales.

“This would represent approximately $2.0 billion–$2.4 billion in EV, or essentially 100 prcent of FOSL’s current EV. This should provide a backstop to current valuation,” Yruma added.

At last check, shares of Fossil had climbed 7.87 percent on the day to trade at $35.51. Yruma has set a price target of $42.