McRae Industries: An Undervalued Stock

| About: McRae Industries, (MCRAA)


Trades at a significant discount to its peers.

Generates a high free cash flow yield and returns cash to shareholders via dividends and share repurchases.

Management owns over 40% of the company aligning its interests with shareholders.

McRae Industries (OTC: OTCPK:MCRAA) is a leading manufacturer and distributor of western, work, and military boots. The company was founded in 1959 and has grown considerably under the stewardship of the current leadership team. With a top auditor like Grant Thornton and brands like Dan Post, Laredo, Dingo, John Deere, Original Johnny Poppers, McRae Industrial, and McRae Footwear, the company is a bargain at the current stock price of $27.45 or approximately 3.5x EV/EBITDA. It should be an acquisition target for a competitor/strategic buyer like Rocky Brands (NASDAQ: RCKY) or any private equity buyer with a focus on consumer goods.

As of the latest quarterly report, western footwear accounts for roughly 68% of revenue (36% gross profit margin) while work and military footwear accounts for the remaining 32% of revenue (18% gross profit margin).

McRae Industries currently has a market capitalization of $66.7 million. As of January 31, 2014, the company had $13.5 million of net cash & equivalents, $3.6 million of real estate held for investment purposes (which is likely undervalued on the balance sheet by $2-4 million), and $2.3 million of cash surrender value of life insurance. The company also had $17.3 million of receivables, $22.7 million of inventory, and total liabilities of $5.9 million (no debt). Total book value as of January 31, 2014 was $60.1 million for a Price/Book ratio of 1.1x.

Over the last twelve months, the company generated revenue of $104.4 million and EBITDA of $13.5 million or an EBITDA margin of 13%. With annual CAPEX running about $800k (less than 1% of revenue), the company is generating a free cash flow yield (defined as [EBITDA - CAPEX]/Enterprise value) of roughly 27% (assuming all investments and the cash surrender value of life insurance are considered cash) and trades at an EV/EBITDA multiple of 3.5x, which is very inexpensive relative to its peers.

Rocky Brands trades at 7.7x EV/EBITDA, Deckers Outdoor (NASDAQ: DECK) trades at 9.7x EV/EBITDA, Wolverine World Wide (NYSE: WWW) trades at 12.3x EV/EBITDA, and Steven Madden (NASDAQ: SHOO) is currently valued at 9.4x EV/EBITDA.

The McRae family owns 44% of the company. Therefore, management's interests are aligned with shareholders. The company has historically repurchased shares each year and pays a 1.9% annual dividend (13 cents per share each quarter totaling 52 cents per share annually).

A conservative multiple range of 6-7x EV/EBITDA would value the stock between $42 and $47 per share, meaning a premium of 53% to 71% over the April 17th closing price of $27.45. According to Yahoo Finance, the 50-day moving average of the stock is currently $32.61 while the 200-day moving average is $30.22. Therefore, MCRAA is cheap not only from a fundamental standpoint but a technical standpoint as well.

Disclosure: I am long MCRAA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I personally own shares of MCRAA, and so do the accounts that I manage.