Tag Archives: Long Ideas

Weyco Group: Good Brands, Family Management, Growing Business

12 Mar

About: WEYS (Weyco Group, Inc.)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Weyco Group (WEYS), incorporated 1906, designs and markets footwear of the mid-priced men’s leather dress shoe variety. The company purchases finished shoes from third-party manufacturers, located in China and India, and sells them wholesale, retail and over the Internet. The company has been successfully acquiring brands and growing revenues, all while maintaining a solid balance sheet with no long-term debt (albeit with some short-term debt representing about 15% of total assets).

The company looks well positioned to prosper in the future, and while the market price is not necessarily discounted, the company is attractive for the following reasons:

1. Safe capital structure with liabilities less than current assets alone
2. Growing revenue and brands
3. It is still reducing its retail store count which has been a drag on performance until recently
4. Family ownership
5. Growth is not (completely) priced into the stock
6. Has never had a loss in the last 10 years

Brands

When Warren Buffett’s Dextor Shoe investment didn’t work, it was because Dextor Shoe was a manufacturer located in the United States. Labor costs made the business uncompetitive in short order and it was deemed his “worst mistake.” Weyco, however, is different and avoids the problems of shoe manufacturing. It, therefore, is mainly a steward of its brands, its marketing and its distribution (and, to a small and continuously decreasing extent, its retail stores).

Therefore the brand portfolio is the most important thing about this business, although it is basically impossible to value brands with any amount of precision. The company sports the following brands:

1. Florsheim (see at Nordstrom (JWN))
2. Nunn Bush (see at Kohls (KSS), official site)
3. Stacy Adams (see at Zappos (AMZN))
4. BOGS (see at Amazon, or at the official site)
5. Rafters (see at Planetshoes.com, or at the official site)
6. Umi – children’s shoe (see at the official site)

As the CEO Tom Florsheim Jr. noted, “all the brands in our portfolio had sales increases in 2012.” One can see this below in wholesale segment year-over-year revenue growth for the full year 2012:

Brand    |    Year-Over-Year Wholesale Sales Dollar Growth

Florsheim    |        8%

Nunn Bush    |    1%

Stacy Adams   |     10%

BOGS & Rafters [1]  |      7%

Umi [2]    |        19%

Total Average   |     10%

The wholesale segment, representing 74% of revenue, sells to over 10,000 clothing, shoe and department stores. JCPenney (JCP) was the only major customer representing greater than 10% of sales before 2010 – it has since fallen below the 10% threshold. If growth continues, the current market price of the company is very attractive.

The company’s management believes that BOGS, a branded purchase a little over two years ago, presents very favorable opportunities as they believe they can increase sales faster than the category will grow. They also believe it will have a presence in the industrial use market – although they note that such uses will take a long time to grow and develop.

In addition to the opportunities provided by BOGS, the company also launched a “successful kids business in the fall” which they see as “avenue of expansion in 2013.” Of all the brands above, I personally like Florsheim, Stacy Adams and BOGS the most (and Nunn Bush the least).

Ownership

There is significant family ownership with the father and son Florsheim owning together some 824,490 shares, or 7.6% of the company. It is worthy of note, I think, that the Florsheims are the descendants of the original founding family of the Florsheim shoe brand (read about Florsheim’s shoes here). So, in essence, their 2002 takeover of the company was essentially a recapturing of an old family heirloom. Given that they are minority shareholders, like the other shareholders, they will not be able to tyrannize the business. Also, I personally like the families’ involvement because both men want, I assume, their namesake brand to be successful and therefore neither have a reason for letting the long-term business down. This is to say, that I believe both men are more likely to have a long-term time horizons. If true, this would be unlike most corporate cultures whose emphasis is on meeting near-term goals – since, of course, that is how managers are evaluated [3].

Valuation

For the full year 2012, the company earned approximately $20.4m. Over the current market capitalization of $256m, they earned a yield of 7.9%. This, by itself, is not enough to justify purchase.

Because current cash flow is squeezed due to increased levels of working capital (to deal with growth) and due to some large one time capital expenditures, let us assume that GAAP net income is a good approximation of the company’s future cash generating abilities, rather than, say, the free-cash-flow metric.

If we assume a discount rate of 11%, the company will need growth at a rate of at least 3% going forward for a purchase at today’s prices to be worth it. If it can achieve rates higher than 3% the company is undervalued. This is by no means certain, but given the company’s plans, it would seem probable that such rates could be achieved going forward. After all, they just launched their children’s shoe line and most recent growth in their wholesale segment was about 10% year-over-year, as seen above. If we look at the company’s recent revenue growth we see the contribution of the BOGS and Rafters brand acquisitions, but we also see the trajectory maintained in other brands after the acquisitions were fully consummated:

Also, the company reported “comps” in its retail segment of around 8%. They state, however, that the retail segment includes e-commerce and Internet sales. Further, management states that Internet sales are expanding rapidly and that they expect further improvements in the future. These facts combine to suggest that Internet is pulling the retail segment along (currently at 8.2% of revenues) — hopefully Internet sales continues to increase in the future.

Conclusion

This company is fairly valued if it never grows at all. Essentially, that would mean that the stock would have average returns over time. However, with the recent launch of the child’s line and their expansion of BOGS and Rafter brands in Canada, the company is clearly trying to grow revenues. In the midst of this, the company has no long-term debt and is well capitalized. The most attractive feature, however, is that the downside is limited since the shoe industry is unlikely to disappear. Stability and sureness of future returns are rare and attractive features. Provided the company can keep its brands in style, it is unlikely that demand for men’s dress shoes – and shoes in general – will face any substantial declines.

The most conservative move would be to watch the company and wait for a better price to off-set the risk that future growth is nonexistent. However, it seems more likely than not that the brands will continue to grow and therefore increase revenues going forward.

Therefore, one finds that we are in the position where the future is the vindication for the investment – which is not my preferred method of approach. In this case, however, I believe the downside is quite limited if one has a sufficiently long time horizon.

Please see my securities disclosure.

Notes:

1.    Year-over-year sales were up 28% actually, but that only counted 10 months of sales in 2011. My figure is an estimated growth figure taking into account the period-to-period discrepancy.
2.    This is an estimate from the nine-month results released September 2012. All other percentage figures are from the December 2012 numbers.
3.    This sentence was written with the book Moral Mazes in mind.

Originally Published at SeekingAloha

Author: Intangible Valuation

Google’s Chromebook Pixel Proves A Point

23 Feb

Disclosure: I am long INTC, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (Ashraf Eassa)

I don’t expect Google’s (GOOG) Chromebook Pixel to sell particularly well. I’m of the camp that Microsoft’s (MSFT) OS and ecosystem are far too entrenched in the PC space for Google’s Chromebook line to really make a dent at the high end. Sure, the low end Chromebooks are selling like hotcakes; they’re cheap and “good enough” for what most people are probably buying them for (secondary systems), but paying $1,300 for a Chromebook that won’t run the wide variety of applications available on the Windows platform seems a little bit of a stretch. It’ll be a niche product that gets Google some spotlight, but until the Chrome OS is more firmly entrenched in the computing landscape (and the low end Chromebooks are the way to do this), a high end Chromebook is perhaps the right device at the very wrong time.

That being said, Google’s management has historically shown itself to be very capable of doing things the “right” way. In particular, the newly announced Chromebook Pixel does a lot of things just so right that the PC vendors keep getting wrong generation after generation that I’m almost sad that this new Chromebook likely won’t be a particularly big commercial hit. However, putting away my inner geek’s emotional state and putting on my industry observer cap, I want to just show everyone just why Google clearly “gets” it, but the majority of the Windows PC space doesn’t.

The Screen: It’s What Users Look At

The PC industry’s screen selection represents quite a sad state of affairs. Today, I can go buy a $499 Apple (AAPL) iPad 4 with a 2048×1536 display that will have a better display than any notebook PC on the planet. Heck, Google’s Nexus 10 tablet sports a pretty nice 2560×1600 display (although the quality of the Google display isn’t quite there with the Apple). But what about the typical PC? Or, let’s do one better — let’s look at the Intel (INTC) sanctioned Ultrabooks (which are supposed to bring back the excitement to the PC). A quick trip to Newegg.com gave me the following options for displays on Ultrabooks:


Do you see the problem? The majority of these devices sport a crap 1366×768 display with awful contrast, terrible brightness, and questionable colors. A few have solid screens like the Lenovo (LNVGY.PK) Yoga (but are stuck in 1600×900 land), and then fewer still have truly quality 1920×1080 screens. Oh, and nothing above 1920×1080.

So, why is it that I can buy tablets with better screens than what I can get on an Ultrabook? Well, a big part of it is that these notebooks sport much more RAM, storage space, and processing power than their tablet brethren, so less of the BOM costs can be allocated to the display. Further, the displays on notebooks are simply bigger, so the raw materials cost is likely much higher.

But see, that’s not my problem. By all means, offer lower end products at a lower price point; not everyone can afford to drop $2,000 on a top-notch, no-compromises notebook. The problem is that there is precisely zero ultra-high-end display representation in the Windows PC space. This blatant omission further fuels the perception that Windows PCs are “cheap” and for those who “can’t afford a Mac”.

Let’s Fix The PC, Guys

It’s time to fix the PC. Microsoft did a commendable job with its “Surface Pro”, as most reviews point out that it has a gorgeous, well-calibrated display (and for a 10.6″ device, 1920×1080 is plenty of pixels per inch), but there are a few nagging limitations that keep it from being a general purpose laptop replacement at this point. Lenovo’s doing a good job, too, with its “Yoga” and upcoming “Helix” lines, although I’m quite frankly surprised that the company hasn’t put out a super high resolution display laptop just for bragging rights. I would like to specifically praise Acer for releasing its “S7” line of laptops; they’re expensive, but for the limited time that I had to play with one, I couldn’t help but be blown away by the screen quality. The only problem is that it’s $1,600. Dang.

But really, the PC industry will start to grow again if the PC vendors get their acts together and start making compelling devices. Intel’s “Haswell” should enable some nice new form factors and significantly improve battery life (a big tablet advantage), but beyond that there needs to be a focus on build quality (ala Apple and apparently Google), as well as ease of usability (please stop cluttering the PC with useless pre-loaded applications).

I think the PC/hybrid categories can be truly exciting, but the OEMs need to put out devices that people truly want. Google’s got the right idea with the Chromebook Pixel, but the Chrome OS immediately strips the value proposition. Could someone in the Windows camp please get it right? Apple and Google have already illuminated the path, but the PC vendors need to be gutsy enough to walk it.

Originally Posted at : Seekingalpha.com

Google: Analyzing The Downside Risks

22 Feb

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

chart-GOOG

Introduction

Google (GOOG) is the world’s second biggest technology company by value and has a dominant position in some key technology markets such as search, internet advertising and mobile operating system. The company is a colossus of the Internet world and can make or break many enterprises in the world today through its sheer power and reach. In fact most of the Internet revenue models are becoming increasingly dependent on Google’s network. Most Internet companies and websites would give an arm and a leg for a top listing on Google search results for popular keywords. Unlike other big technology companies such as Microsoft (MSFT), Google has not stagnated but has continued to innovate and bring out great new products and services (Gmail, Android, Google Maps etc.). While there has been criticism about Google’s excess dependence on search for revenues and profits, the market is giving a high valuation to Google because the company’s new products have a lot of potential. While Google’s stock is currently trading at a higher valuation compared to other mega cap tech companies such as Apple (AAPL), Intel (INTC), Cisco (CSCO), we remain convinced of Google’s long term growth potential.

1. Competition

Microsoft – Google’s biggest competitor in the technology industry is the Seattle behemoth Microsoft. The company fights with MSFT in a number of areas such as search, operating systems, email, office productivity software etc. Google has a stranglehold in the tablet and mobile operating system market with Android. To counter this, MSFT has made the latest Window 8 operating system more mobile and tablet friendly. Microsoft is also making a strong effort to retrieve its numero uno position in email by introducing features that gmail does not have, such as ability to send large file sizes. MSFT has spent billions of dollars to improve Bing’s technology and acceptability, but the company has not managed to significantly slow down Google’s strong double digit growth.

Apple – The company has become a bitter rival from a partner in the last few years. Google’s Android operating system directly threatens Apple’s iPhone smartphone ecosystem by giving a well supported decent operating system for free to hardware vendors. The erstwhile CEO Steve Jobs spoke of a “thermonuclear war” against Google. Apple recently introduced its own maps application replacing the popular Google Maps. Apple is also trying to reduce Google’s search dominance through the Siri application.

Nokia – Nokia has become another strong competitor to Google after the company joined the MSFT camp ditching its own Symbian operating system. The biggest risk that Nokia faces in regaining its lost market share is from Android mobile phone makers.

Samsung – While Samsung is a partner to Google currently, we think that Samsung will become a strong competitor soon. The reason is Google’s acquisition of mobile hardware vendor Motorola. Google has already become both a partner and a competitor. Samsung being the No.1 mobile phone supplier will have to reduce its Android dependence either by selling more Windows handsets or by making its own O/S (Tizen).

Facebook – Facebook is Google’s biggest threat in the Internet advertising space. Facebook gets a huge amount of Internet traffic and is desperately trying to monetize this traffic through various means. The company recently introduced an internet search product which competes with Google Search.

Yahoo – Yahoo is no longer one of Google’s major competitors given its reduced size and ability. Yahoo search and internet properties are not much of a threat to Google. In fact Yahoo recently signed a display advertising agreement with Google to better monetize its existing display properties.

Blackberry – The iconic Canadian smartphone company has been massacred by Android and Apple in its core smartphone market. The company is trying to make a comeback with a revamped operating system BB 10. We are not sure how much BB 10 and the new smartphones will succeed. We think it will be difficult for BBRY to regain its lost market share without the help of a stronger company. BBRY can pose a big threat to Google if it is bought and leveraged by one of the big technology companies such as Samsung.

Google also has many more competitors such as Baidu (BIDU) etc. In summary, Google faces formidable competitors in almost all areas. However, Google has a history of fighting strong competition against all odds.

2. Regulatory Pressures – As Google becomes a bigger information power, it is colliding with global governments on how information is collected and disseminated. The company was recently forced to succumb to French government pressure on posting of links of French newspaper articles on its Google News. The company was also driven from China, as the government there likes to be in total control over information flow. The company has been subject of an FTC investigation over unduly favoring its own products when displaying Google search results. Microsoft used to be the target of strong government regulation in the past because of the power of its Windows operating system. Google is now facing the same situation due to the dominance of its search product.

3. Don’t be Evil – Google has always advocated that it won’t become a large big “evil” corporation however in recent days the company is not exactly living up to its stated principles. The company has come under attack for revealing information to the government agencies. The company has also attracted heavy fines for breaking into Wi-fi networks during collection of data for Street View. The company has become too strong in the Internet advertising market and its difficult to find decent alternatives to Google’s adsense network. Google recently stopped sharing private search referral data with external websites, though the company’s own Adword network has access to this private search data. The company has the power of death over small businesses and websites. Google’s new algorithm changes (Panda and Penguin) have led to a huge traffic loss for many websites which used to follow SEO techniques. While these initiatives are not wrong as they have helped in reducing SEO spam, this shows the power that Google has over others. Google is also promoting its own social network Google Plus by giving higher rankings to search results which are linked to Google Plus authors. Small players in the Internet world have no redressal mechanism against undue display of Google power.

4. Privacy Issues – Facebook has faced huge attacks from users whenever it has introduced monetization measures based on the private user data. I have found that a number of Google users have also started getting irritated by targeted ads based on personal data. The aggressive promotion of Google Plus and other Google products is also not very customer friendly in my view.

5. Motorola – Google bought Motorola for more than $12 billion in order to protect its Android operating system from patent lawsuits by other telecom companies. Despite restructuring, Motorola is still showing operating losses. Also Motorola will make other Android users such as LG and Samsung doubt Google’s impartiality.

Valuation

Google’s valuation is not expensive if you use traditional metrics with a forward P/E of ~16x. The P/S of 5.1x and P/B of 3.6x is also not exorbitant. However if you compare Google’s valuation with that of mega cap technology plays then it is quite expensive. You can buy most of the other technology companies at a P/E of ~10x. The reason for the higher valuation is that the market is factoring in Google’s higher future growth rate.

Summary

Google has a great portfolio of new products and services which has led to the stock touching all time new highs. The market has started to recognize the strong earnings potential of Youtube, Android etc. Also despite numerous attempts by competitors to break Google’s stranglehold on Internet search, the company has managed to grow earnings and revenue in the high double digits. The competition for Google remains high across all product segments and the company faces increased challenges due to its greater size. However, Google has managed to overcome competition quite effectively in the past and we believe it will do in the future as well. As the stock has run up quite a bit in recent days, we would look to buy on dips.

Originally Posted at : Seekingalpha.com