K-Swiss: A Bargain at Current Prices (KSWS)

Jun. 6.06 | About: K-Swiss Inc. (KSWS)

K-Swiss (NASDAQ:KSWS) is one of the most exciting companies that my Family Fund owned. Let me tell you why…

Step 1: FCF/EV yield vs. Treasury yield

Current price/share = $26.50

Enterprise Value [EV] = $725M

Free Cash Flow [FCF] = $86M

FCF/EV yield = 11.86%

Treasury yield (30 years) = 5.30%

K-Swiss looks like an excellent deal compared with the treasury yield.

Step 2: Insider holdings

I have mentioned about getting strong returns by investing in founder-CEO companies. Investing in companies that have significant insiders holding is one of the great ways to achieve superior return.

Steven Nichols has holdings over 22% of the K-Swiss.

To read my previous comment on insider holdings, click here.

Step 3: Is K-Swiss a good company?

Profit Margin [ttm]: 14.70%
Operating Margin [ttm]: 20.33%

Return on Assets [ttm]: 19.43%
Return on Equity [ttm]: 27.45%

These simple metrics show that K-Swiss is an excellent company.

Step 4: Is K-Swiss management shareholders-orientated?

K-Swiss has been raising its dividend payment every year from $1.4M in 2003 to $5.8M in 2005. Also, K-Swiss has been buying back its own shares aggressively, and consistently. Share repurchase increased from $17.6M (2003) to $25.9M (2005).

Step 5: Do you understand its Business?

K-Swiss Inc. designs, develops and markets an array of athletic footwear for high performance sports use, fitness activities and casual wear under the K-Swiss brand. The company also design and manufactures footwear under the Royal Elastics brand name. Royal Elastics, a wholly owned subsidiary, is a leading innovator of slip-on, laceless footwear. Sales of Royal Elastics brand were not significant during 2005.

K-Swiss was founded in 1966 by two Swiss brothers, who introduced one of the first leather tennis shoes in the United States. The shoe, the K-Swiss “Classic,” has remained relatively unchanged from its original design, and accounts for a significant portion of sales. The Classic has evolved from a high-performance shoe into a casual, lifestyle shoe.

K-Swiss has emphasized in their marketing the commitment to produce products of high quality and enduring style and they plan to continue to emphasize the high quality and classic design of their products as they introduce new models of athletic footwear.

On December 30, 1986, K-Swiss was purchased by an investment group led by its current President. Thereafter the company recruited experienced management and reduced manufacturing costs by increasing offshore production and entering into new, lower cost purchasing arrangements. Their products are manufactured to specification by overseas suppliers predominately in China. In June 1991 and September 1992, K-Swiss established operations in Taiwan and Europe, respectively, to broaden distribution on a global scale.

Step 6: Does K-Swiss have a moat?

Shoe companies are subjected to extreme competition, as their products are fashion-oriented. In order to tackle this problem, K-Swiss concentrates on classic styling to reduce the impact of changes in consumer preferences, reduce total markdowns over the life of the products, thereby enhancing their attractiveness to retailers and also enabling them to maintain inventory with less risk of obsolescence. K-Swiss’ classic shoes accounted for 69% of their 2005 sales.

Step 7: Does any superinvestor invest in K-Swiss?

Excellent companies attract excellent investors. Marty Whitman of Third Avenue Value Fund owns about 4.4% of K-Swiss. As you know, Marty Whitman is regarded as one of the deans in value investing, and he is an “aggressive, yet conservative” superinvestor.

Another young, but emerging great investment manager, Jim Chuong, owns a huge amount of K-Swiss in his fund. To be exact, K-Swiss accounts for 27% of his portfolio!

Step 8: What are the potential risks in buying K-Swiss?

As I mentioned above, shoe companies are subjected to intense competition. Fashion changes quickly, and therefore, it is very hard to create a strong “moat” around its products.

Conclusion:

At its current price of $26.50, K-Swiss is an excellent bargain. I’ll end my article with the wisdom of Warren Buffett:

"Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analysed an investment alternative characterized by many constantly shifting and complex variables"

KSWS 1-yr chart:

K-Swiss 1-yr