I wrote about my initial purchase in Shoe Carnival (NASDAQ:SCVL) (16.40, $207mm market cap) nine months ago, warning that it could drop into year-end, which it did. Since then, though, the stock has rallied sharply (+18%), easily besting the market (by about 35%):
Despite the rise, the stock continues to hold a spot in both my Top 20 Model Portfolio and my own holdings because it remains very inexpensive. To review the original thesis, the stock seemed to overly reflect the headwinds, trading below book value despite continued positive earnings and lots of cash without any debt. Some of my other observations at the time:
- Very large inside ownership
- High short-interest
- Strong institutional sponsorship despite the size
- Stock was very oversold
- Potential for industry consolidation
- Ultimately, shoes must be replaced
As I reevaluate the holding, I note that the inside ownership remains high at 33%, down slightly from when I first bought the company. The Weaver family has reduced its holdings slightly. Short-interest has actually increased and represents 11 days of volume and 8% of all shares outstanding. The top 4 institutions, each of which owns in excess of 5% (as of 6/30), own a combined 33%, with a small net-add in Q2. The selling was quite limited in general. The stock is now slightly overbought, suggesting perhaps an interim pause. The rest of the story remains the same with respect to potential consolidation as well as the potential for pent-up demand.
As a shareholder, I have now had several opportunities to listen to management. I have a great deal of respect for how they are combatting these challenging times. I like that they are using their strong balance sheet to forge ahead on opening stores at a time where many real estate opportunities are presenting themselves. I believe that the survivors come out of a recession stronger.
Not surprisingly, the estimates have come down, actually substantially, since I wrote in November. The PE, it follows, given the lower estimates and the higher price, is higher than at the time I wrote initially, but the passage of time has diminished some of that expansion. This chart updates the original graphic:
Where can the stock go? First, it needs to clear resistance at 17. As I look out a year, I expect that FY2011 growth could be in excess of 20% too as margins return and the sales growth from new stores kicks in. Blending the 2010/2011 estimate to get about 1.35 and applying a reasonable mid-cycle PE of 15X would yield a target a year from now of 20. On a Price/Book basis, this level would still be dirt cheap (1.2X). If I had to do an over/under on 2011, I would go with over 1.50. They earned 1.70 in FY07.
So, the price today is much closer to fair value that it was when I first bought, but I believe the upside remains. When earnings trough, the PE should be at its highest. In that regard, I could argue that the stock should trade closer to 20 today. The net margin has dropped from 3.6% at its peak to just 1.7%, with a more reasonable long-term expectation of 2.5%. As long as the company continues to generate free cash flow and trade close to tangible book value, I will give it the benefit of the doubt.