Substantial Upside in Foot Locker (FL)

Mar. 2.06 | About: Foot Locker, (FL)

Recently, I posted a comment on Foot Locker where I had disagreed with an analyst downgrade.

In yesterday's edition of Whitney Tilson's Value Investor Insight, (which I recommend as a first class thought piece on value investing) there is an interview with Ken Shubin Stein of Spencer Capital Management who also likes the stock.

He points out the potential reduction in operating expense that should occur as operating leases on some expensive, over-sized property wind down. He believes that operating margins could expand to 10% from current levels of 7.5% over the next three years.

He believes that the company could be reporting $2.40 in free cash flow in three years, producing an incremental $900 million in free cash from today. To put it in perspective, FCF per share today is about $1.10.

With his somewhat more optimistic view from mine, he thinks FL will show a FCF yield of over 8% (versus my view of 6.5%) and by doing additional share repurchases above my estimate, could be worth $48 per share as compared to my guess of a high $30's low $40's valuation.

In my view, the stock has little downside from current levels. It seems both Ken and I perceive a decent amount of upside.

Note that I, my family, and clients have positions in Foot Locker.

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