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Shares of The Buckle, Inc. (NYSE:BKE) have posted a negative return of -7.33% over the past 12 months. The current price of $39.57 is just slightly above the 52-week trading range between $33.97 and $50.00. The price gives a valuation at 5.7x the NTM EBITDA and 11.5x the NTM EPS, and thus, in my opinion, represents an attractive entry point for this solid dividend investment.

The following make for four compelling reasons supporting my view:

1) Buckle is undervalued. Consensus estimates predict revenues, EBITDA, and EPS to rise by a 2-year CAGR of 5.8%, 6.5%, and 6.3%, respectively, putting the stock price at a PEG of 1.2x, and suggesting a fair valuation. Based on the comparable analysis for major fashion apparel retailers in the U.S. (see below), Buckle indeed has a lackluster growth potential. However, the firm is the most profitable apparel retailer among the group as reflected by its superior margin and return measures.

Buckle is also a free cash flow generating machine and is able to fund its operations without debt. Both the sizable current and quick ratios suggest a healthy balance sheet. In addition, Buckle sits on $220M cash, amounting to 11% of the current market capitalization. As such, it is reasonable to assume that the financial excellence should merit a valuation premium. But the relative valuation model (see below) actually requires a 4.7% discount on both the peer average P/E an EV/EBITDA multiples to justify the current stock price of $39.57, implying a lack of credits for the firm's healthy financial condition.

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  • Estimated revenues, EBITDA, and EPS have all demonstrated a bullish trend with most estimates having sizable upward revisions over the past 12-18 months (see below).

2) Dividend payout is likely sustainable and the size of share buyback could potentially turn larger. The free cash flow has been steadily increasing over the past 10 fiscal years (see below). The strong FCF generating ability is likely to continue supporting the dividend payout, which is currently yielding at 2.02%, as annual dividend paid only represents a small portion of the FCF. Thus, it is also reasonable to expect that Buckle will likely increase its current buyback scale as the FCF continue to grow.

3) It appears that there has been a technical price support in between $34 and $37 since the end of 2010 (see below), and the current stock price is near that level.

In conclusion, investing in Buckle offers investors a solid margin of safety, given the stock's attractive valuations, solid growth prospects, sustainable dividend payout, and likely larger buyback size. I strongly recommend acquiring the shares at the current price.

Comparable analysis table and free cash flow chart are created by author, consensus estimates table and stock price chart are sourced from Capital IQ, and financial data is sourced from Morningstar and Capital IQ.

Disclosure: I am long BKE.

Source: Here Is Why You Should Buy This Solid Dividend Stock