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As most Amercians are painfully aware, the U.S. economy has been languishing for several years now. Recently however, there have been some encouraging signs that the country could be starting to return to more substantial growth. Economists now predict that growth in the U.S. could reach 3% by the end of 2013. This is pretty close to historic growth levels.

One industry that traditionally does well as the economy picks up is clothing retailers. To position my portfolio to take advantage of this trend, I was recently looking for a solid retail company to invest in that fits with my value-oriented strategy. This is where I stumbled across The Buckle (BKE).

For those who don't know the company, The Buckle operates as a retailer of casual apparel, footwear, and accessories for young men and women in the continental United States. The company has 433 stores in 43 states. The company was founded in 1948, and currently has a market cap of $2.07B.

Here are five reasons why I think The Buckle is a great addition to any value portfolio:

  1. Well-Managed - ROI, ROE, and ROA are all averaging over 25%. This is significantly better than the industry averages.
  2. Shareholder Friendly - Insider Ownership is an impressive 40%, which is always a positive sign, showing strong alignment between top management and common shareholders. In addition, there is a consistent dividend, with a current yield around 1.80%. Also, the company has a history of giving generous special dividends every year since 2008. If The Buckle continues this practice, the yield is closer to an impressive 7%.
  3. Zero Debt - The company has zero debt, and more than $197m in cash.
  4. Magic Formula Screen - The company has recently been showing up on the magic formula screens. For those who don't know what this is, the magic formula is a value stock picking methodology created by Joel Greenblatt and popularized in his book, The Little Book that Beats the Market. The basic premise of the method is to find companies with a high earnings yield (measured by EBIT/EV) relative to the Return on Invested Capital (ROIC) that they produce. So you are screening for "good" companies at "bargain" prices. Following this method, The Buckle is currently in the top 50 of all companies listed on the major stock exchanges that are over $1 billion in market cap.
  5. Reasonable Valuation - Not only is The Buckle a good value according to the Magic Formula strategy, but it is also attractively priced compared to its major competitors based on P/E, as the table below shows. The company also have a very reasonable EV/EBITDA ratio of 6.78. Also, if you conduct a simple DCF analysis using the GuruFocus fair value calculator, you will get a margin of safety of around 50%. The model bases the future earnings growth on the previous 10 years of EPS growth rate, which was a very impressive 19.7%. Personally, I would use more conservative assumptions in a DCF model than the default in this one -- but even with a lower growth rate, you should still see some margin of safety in the shares.
CompanyTTM P/E
The Buckle13.39
The Gap (GPS)20.26
Abercrombie & Fitch (ANF)30.93
American Eagle Outfitters (AEO)27.39

Conclusion

For those looking to add exposure to the retail sector, The Buckle is a great company to have an in-depth look at -- especially for value-oriented investors. The company has a record of being very well-managed, conservatively financed, has shown repeated shareholder-friendly actions, and is trading for a relatively attractive price. Although I don't think the company is priced as a "deep value," I think it's important to remember, as Warren Buffett has often said, "It's better to buy a well-managed great business at a fair price, then it is to buy an average business at a great price." I think The Buckle definitely fits into this category.

Source: 5 Reasons To Buy The Buckle