COMMENTARY | COLUMNISTS | BRENT WILSEY

Stepping into a Foot Locker investment

As I expected, now that the "fiscal cliff" has been resolved, the worry has already turned to the debt ceiling.

And as I said with the "fiscal cliff," that a solution would be found in time, the same holds true for the debt ceiling: It will be raised, there is no other option.

As far as the United States receiving another credit downgrade goes, that will likely be a fear that will make headlines. We are in better shape than last time. I know many will argue that point, but progress has been made and we did not go over the fiscal cliff.

I received a request from Linda in Los Angles, who invested in Foot Locker (NYSE: FL) at $36.99 and has seen it fall about 10 percent. She is wondering if she should hold on or take her losses and invest in another company.

Foot Locker operates athletic stores and direct-to-consumer retail, and its 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. I was surprised to learn it has 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 52-week high/low of $37.65/$24.41.

Linda, one thing I noticed right off the bat was that you probably invested back in September when the company was hitting 52-week highs, which was only 66 cents above what you 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 52-week highs. The stock has now declined to trade around $33 and change, and 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 invested in this company the valuation ratio was higher, making the stock less attractive at that time.

Currently, the company does pay a nice dividend of 2.2 percent, using only 29 percent of earnings to pay out that dividend. It has grown that dividend about 10.5 percent over the past five years.

Sales look good year over year, increasing 8.3 percent, slightly better than the industry average of 7.7 percent. Earnings per share year over year did far better, climbing 48.2 percent compared to the industry growth of only 14.8 percent. I would check those earnings to verify that they were coming from operations and not due to other accounting reasons.

Foot Locker maintains a strong balance sheet 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 good at 5.8, well below the industry average of 32.7. Return on equity was 17.1 percent below the industry average but I’m ok with a ROE of 15 percent or better.

The company has a net profit margin of 6.3 percent, just under the industry average of 6.6 percent. 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.

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. Using a PE of 16.5 would yield a stock price of $46.69 right around a 40 percent gain from current levels. I also wanted to point out that over the last 90 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 percent.

I would not sell at this level, and depending on how much the company makes up of your portfolio, you may want to consider adding to the position with a 10-15 percent pullback in the stock if the fundamentals remain as strong.

I would also remember to be patient when investing in a company and be cautious about buying around the 52-week high.

Have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com.



Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.

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