Monday, April 17, 2006

Timberland and Nike Squash the Competition

Face it: The domestic footwear market is saturated beyond belief. It's a miracle firms still print money in such adverse conditions. It doesn't take a MBA to figure out that to survive, a footwear-driven firm needs a highly differentiated product and/or image to capture customers and hit critical mass. If we had to pick just two to invest in, we'd nominate Nike and Timberland.

Nike (NKE) With an international expansion agenda we like -- and a belittled 15x P/E multiple to go along with it -- we rate NKE a strong buy and see the stock hitting par before Labor Day. Nike virtually invented the game -- no one knows marketing better and no one in the footwear/outerwear category carries as much financial muscle ($2B cash on the books) as Nike. Global reach? Yup, Nike owns that, too. The Air Max 360s are white hot; the World Cup this summer should pump up overall sales; and lower-priced sneaker penetration into Walmart all lead us to believe investors are underestimating Nike's potential. A new CEO is in place (Mike Parker, who cut his teeth at Nike and knows the business like the back of his hand) and the company even got those labor abuse protestors off its back. We suspect that Nike will deploy some of its excess cash on acquisitions (the name already has top brands like Converse and Cole Hann under its wing) or higher dividend payouts -- hopefully both. On a pullback, we'd be all over this stock like a bad rash.

Timberland (TBL) In our opinion, this boot maker steps all over the competition. They should teach Timberland 101 in business schools around the world because this company's mastered the art of targeted marketing and/or psychographic profiling (remember the mid 90's, anyone?) While growth has slowed down lately, we respect management's refusal to bow down like suckers and mimic seasonal, come-and-go trends. As a result, we feel TBL's core image/formula (rugged meets premium = smoking concept) remains intact. As long as international sales remain robust, we expect TBL to stick around as a dominant player in a typically low moat business. The math looks pretty as well: TBL currently sells at 14x earnings (rival Wolverine Worldwide [WWW] goes for almost 17x EPS) and 12x cash flow. Operating margins are coming in at 15%. Finally, Timberland is debt-free and has $213 million in cash it can use to stomp out whatever upstarts foolishly decide to get in its way.

Briefly, we feel both these names are branding geniuses with impressive balance sheets. Their leadership positions attest to their wide moats and at their current valuations, we'd wholeheartedly scoop up shares to add to a portfolio.

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