Buckle Inc. (BKE) Quick Review: I'm holding on!

Sep. 29, 2010 3:31 PM ETBKE

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I am a private investor building a value focused portfolio. While I do not work directly in investing, I do have a financial background and hold the CFA designation. The goal of Margin of Safety Investing is to share my investing journey as I review and analyze investing opportunities using a framework inspired from my readings of “value investors”, starting with Benjamin Graham but also Greenwald, Montier, Greenblatt, Lynch and others. The first focus of Margin of Safety Investing is to build a long portfolio of 15 to 25 companies which I believe provide attractive return prospects and an appropriate margin of safety based on the analysis I will share. The goal is to find companies that “I would ...More feel comfortable owning even if the stock market was to close tomorrow for a few years” (Buffet). Later I hope to be able to complement this portfolio with a few opportunistic (spin-offs, net-nets) or even short ideas. As I go through this journey I will share my reviews and analysis in the hope that you will find them worth reading and discussing. Visit my blog: www.marginofsafetyinvesting.com

Buckle Inc. is currently trading at $28.1 and is in the investment pipeline as a “legacy” holding of mine. I should thus decide whether to keep it in my portfolio or not!

1- Business Performance Risk

Metric	Status
FCF / Sales	Over the last twelve months (“LTM”), BKE’s FCF/sales was 9.4% in line with the company’s performance over the last 10 years; ranging from 8% to 15%, with 2002 being only 4%
ROE	LTM: 33%. Over the last 10 years, BKE delivered satisfactory ROE, ranging between 15% to 20% between 2001 and 2007 and reaching 30%+ in 2008
ROA	LTM: 25%, in line with BEC’s performance between 11% and 27% over the last 10 years
Revenue Growth	Revenue growth has been strong and quite stable on a 10 year basis between 9% (most recently) and 12%+
Cash distribution to shareholders	BEC’s dividend yield is currently 2.9% (ahead of the S&P500) with a payout ratio of ~30% BEC does not seem to be making much repurchases, with the # of outstanding shares being more or less constant over the last 10 years

BKE’s business performance is strong with high FCF generation and strong ROE/ROA’s in particular in recent years and despite the slowdown in consumer spending. In addition, BKE has been able to growth steadily at 8-9% on average over 10-year periods.

Cash redistribution to shareholders is mixed with a good dividend but no buybacks. Going forward, BKE’s returns could be interesting:

- 2.9% dividend yield (using about 30% of earnings)

- A lower than historical performance growth of 7% - which using a ROE of 25% would require another 30% of earnings

- Buybacks or cash worth another 3-4% (40% of earnings * current earnings yield of 9.7%)

2- Balance Sheet Risk

Metric	Status
LT Debt / Equity	0! The company does not carry any debt
Current Ratio	3.6x, in line with past performance

BKE’s balance sheet is spotless with no debt and a current ratio which seems high (wasteful?) for the industry. The high current ratio is in part driven by a high level of cash on the balance sheet, worth about 24% of total Assets.

3- Valuation Risk

Metric	Status
Cash Return	7.3%
P/E	10.4x, below the S&P500, the industry and BKE’s 5-year average of 13.9x

BKE valuation seems attractive at this point, with a P/E of only 10.4x on a company which has been growing EPS year on year for almost 10 years! The cash return is also attractive at 7.3% and could leave an investor with enough margin of safety to be comfortable with holding BKE’s stock for a while

Conclusion

I will for now hold on to my BKE shares and perform a full Company Analysis

Disclosure: Long BKE