Timberland: Quality Business At A Decent Price (TBL)

Includes: NKE, TBL, WWW
by: GroovyStocks

Footwear and apparel company Timberland (NYSE:TBL) strikes us as a quality business available at a decent price. We wouldn’t call it dirt cheap and if you are the kind of investor who needs to see a pop in share price over 3 or 6 months, you may not find it here — but if you are happy to own shares of a high quality company and give them time to grow, you may want to take a closer look.

As competitive as the shoe business is, TBL still pumps out nice margins and returns. For the trailing 12 months Timberland has a profit margin of 10.5% and an operating margin of 15.9%. That beats even Nike (NYSE:NKE), the God of Shoes, who has a 9.4% profit margin and a 14.4% operating margin. Competitor Wolverine World Wide (NYSE:WWW) is at 7.0% profit and 10.7% operating. (Yahoo)

Timberland’s return on assets is 20.2% and its return on equity is 31.7%--both highly respectable. For comparison, NKE is at 14.6% and 23.7% , WWW is at 11.2% and 16.2%, and Columbia Sportswear (NASDAQ:COLM) is at 12.1% and 17.2%. Perhaps these favorable numbers can be attributed to the Timberland brand which is considered premium and high quality.

There’s a long term trend of growth in sales and profits with decline in shares outstanding. These things together lead to EPS growth. Here are some numbers for the years ending 12/02 through 12/05:

Sales ($MM): 1190.9, 1342.1, 1500.3, 1565.7
Net Income ($MM): 90.2, 117.9, 152.7, 164.6
Shares Outstanding (NYSE:MM): 72.6, 70.0, 68.4, 66.1
EPS ($): 1.18, 1.62, 2.14, 2.43 (MoneyCentral)

Earlier in the month TBL announced a 6 million share repurchase program—on top of the 1.5 million share repurchase authorization that was still outstanding at year end 2005. This indicates that management thinks the shares are undervalued. The program promises to help the year/year decline in shares outstanding continue.

TBL has a trailing P/E of 14.08 and a forward P/E of 13.63. Its EV/EBITDA ratio is 7.58 and shares are priced at 1.46 times sales. None of these multiples are particularly expensive, although keep in mind that Timberland operates in an industry that is rarely afforded high multiples.

The balance sheet is just the kind we like: no debt and $213 million in cash. Net cash is roughly 9.5% of the market cap.

Insiders own 19.75% of the stock (Reuters) which keeps management motivated. One thing we don’t like is the dual class structure that gives outsized voting power to owners of the Class B shares (the Swartz family). We also wouldn’t mind seeing a dividend and think the company can afford to pay one.

TBL’s growth over the past year has left some investors feeling frustrated, but if you’re of the more patient type, there’s much that speaks to a potential happy ending. At this writing, you can buy shares in TBL at a 3.2% discount to their last close.

TBL 1-yr chart:

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