I received a request from Linda in Los Angeles who made an investment in Footlocker when stock prices were $36.99 and have seen it fall about 10%. She is wondering if she should hold on or take her losses and invest in another company in the stock market today. Footlocker operates athletic stores and direct to consumer, store names include Foot Locker, lady Foot Locker, Kids Foot locker, Champs sports, Footaction and CCS. The company has 3,369 stores in 23 countries and I was surprised to learn they have been around since 1879, I thought it was a new concept. The company has a market cap of just over $5 billion and has a fifty two week high/low stock prices of $37.65/$24.41.
My advice to Linda is the one thing I noticed right off the bat was she made her investment probably back in September when the company was hitting fifty two week highs which was only sixty six cents above what she paid. That is not always a bad thing, but in my portfolio I very rarely will invest when a company is trading close to the fifty two week highs. The stock prices have now declined to trade around $33 and change has a PE of 13.6, below the industry average of 18.7. Price to sales also looked good at 0.83 well below the industry average of 1.24. Price to book value looks good at 2.4, half the industry average of 5.8. Lastly, price to cash flow looks ok at 10.2 just under the industry average of 11.4. I would assume that back when Linda made her investment in this company the valuation ratio were higher, making the stock less attractive at that time.
Currently the company does pay a nice dividend of 2.2% using only 29% of earnings to pay out that dividend. They have grown that dividend about 10.5% over the past five years.
Sales look good year over year increasing 8.3% slightly better than the industry average of 7.7%. Earnings per share year over year did far better climbing 48.2% compared to the industry growth of only 14.8%. I would check those earnings to verify that they were coming from operations and not due to other accounting reasons.
Footlocker maintains a strong balance sheet in the financial markets today with a high current ratio of 3.7 well above the industry average of 2.2 and in my opinion not too high to be sitting on too much liquidity. Debt to equity looks very good at 5.8 well below the industry average of 32.7. Return on equity was 17.1% below the industry average but I’m ok with a ROE of 15% or better.
The company has a net profit margin of 6.3% just under the industry average of 6.6%. Inventory turnover for the last 12 months could be a little better coming in at 3.3 times while the industry was 3.8 times in the current market today.
Looking forward to January 2014 the mean of 17 analysts are looking for earnings of $2.83 with a high estimate of $3.01 and a low of $2.75, a fairly tight range in stock market prices. Using a PE of 16.5 would yield stock prices of $46.69 right around a 40% gain from current levels. I also wanted to point out that over the last ninety days the mean estimate on the January 2014 earnings per share have come up from $2.72 to the current $2.83, a four percent increase. Also noted was that the company has managed to beat the earnings estimates over the last four quarters by as much as 17%.
I would not sell at this level and depending on how much the company makes up of your stock portfolio you may want to consider adding to the position with a 10-15% pullback in the stock if the fundamentals remain as strong. I would also remember to be patient when making an investment in any company and be very cautious about buying around the fifty two week high.
Brent Wilsey, Your Money Maker
Wilsey Asset Management
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