Saucony, Inc. SCNYA
June 23, 2003 - 11:19am EST by
anton613
2003 2004
Price: 11.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 71 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

I recommended Saucony (SCNYA/SCNYB) at the end of last year. Even though the stock has rallied since that time, I believe the stock represents an even more compelling investment today. The company currently sells for a P/E of about 11, at about book value and only about 6% above net current assets.

I would refer everyone to my last write-up to get a better perspective on the company. What makes the stock an even more compelling investment than last year?

1) On May 21 the company declared a quarterly cash dividend of $.04 per class A share ($.044 per class B share). This represents a dividend yield of about $1.4% and confirms management’s confidence in its future performance.

2) Actual earnings continue to totally blow away estimates despite a very challenging retail environment. Consider the performance for the first fiscal quarter ended April 4. Earnings expectations were for about $.27 per share. The company came in at $.42 per share which was double last year’s $.21 per share. Gross margins improved from 34.2% last year to 38.9% in the latest quarter.

3) The company has continued its repurchase program and is committed to buy back shares with its significant cash position of over $27 million or $4.45 per share.

4) After the recent market rally many of the bargains have been removed form the small cap sector. Saucony has been left behind despite its outstanding profit performance.



Valuation:

At about $11.60 per share and with projected EPS for this year of about $1.05 (if we can believe management’s estimates. Over the last year they have completely blown away every estimate they have made.), the company currently sells for a P/E of about 11. The stock’s current P/E is deceptive as the company’s balance sheet includes about $4.45 per share of cash. The company readily admits that most of its cash balance is not necessary to run its business. If one removes about $3 per share of the cash balance in calculating the P/E, it drops to about 8!

With $4.45 per share in cash the company has an immaculate balance sheet. It has a current ratio of 6.7 to 1 and no long-term debt. The company has about $10.90 per share in net current assets and thus is selling for only about 6% over its net current assets which is obviously very rare for a company with the earnings momentum of Saucony.



Outlook

The company anticipates full year earnings for 2003 of $1.02 to $1.09 per share with the second quarter coming in at 20 to 22 cents per share. The only concern here is that the backlog is about flat to last year. Retailers have been cautious about pre-ordering before the outlook becomes clearer. My expectation though is that the Saucony running shoe will hold its own extremely well and the company will easily beat its estimates again.




Summary

In summary Saucony represents compelling value:

- An “adjusted” P/E of about 8
- $4.45 per share in cash
- A share price only slightly above liquidation value
- A highly regarded franchise in the technical running shoe market
- Outstanding profitability and performance over the past year

The only possibly negatives here are the illquidity of the shares, the possibility of a slow down in the company’s earnings growth and the small possibility that management will make a poor purchase with its cash position

Catalyst:

- The Saucony story is clearly not out. The market has not recognized the company’s outstanding performance.

- The company has an attractive franchise that would be very attractive to a larger manufacturer.

Catalyst

- The Saucony story is clearly not out. The market has not recognized the company’s outstanding performance.

- The company has an attractive franchise that would be very attractive to a larger manufacturer.
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