Value Play: Weyco Group (Nasdaq: WEYS)

The global footwear industry is large with $185.billion in annual sales, but it is mature and slow growing. According to Transparency Market Research, the industry is expected to grow at an annual compounded rate of only 1.9% between 2012 and 2018. Quite a comedown from the double-digit annualized growth seen in the high-tech industries that Roadrunner stocks Fabrinet and Brocade Communications operate in.

But what is attractive about the footwear industry is that each of the 7 billion human beings on planet Earth need shoes and the market is so large that small footwear companies can achieve tremendous growth simply by taking market share away from other providers. It also helps if a footwear company has an “asset light” business model that allows the generation of high rates of return on a low investment base.

Wisconsin-based Weyco Group satisfies my criteria of a wonderful business. The company designs and markets footwear, primarily casual and dress shoes (40% of the total footwear market), but doesn’t manufacture any of it, leaving the capital-intensive manufacturing process to foreign suppliers with cheap labor in China and India. While the U.S. once had a thriving shoe manufacturing industry centered in the New England states, it was decimated by cheap imports and has virtually disappeared. Almost 99% of the 2.4 billion shoes purchased in the U.S. every year are imported, 86% of them from China. Some entrepreneurs are trying to revive U.S. shoe manufacturing, but only in niche products and even such a limited revival attempt is unlikely to succeed.

Weyco owns trademarks on valuable brand names such as Florsheim, Nunn Bush, Stacy Adams, Rafters, and Umi. Business segments are as follows:

Source: Company 10-Q filing

Weyco’s CEO is Tom Florsheim Jr. and the COO is John Florsheim, so the company is run by the founding family of Florsheim shoes, which was started in Chicago by their great-grandfather Milton Florsheim in 1892. It’s a long story, but for 50 years (1952-2002) the Florsheim family didn’t own their namesake shoe brand and were only able to re-acquire it in 2002 after uninspired corporate owners had run the company into bankruptcy. The Florsheim acquisition was done through Weyco Group, a competing shoe company, which the Florsheim family has controlled since 1964.

Weyco has thrived since the Florsheim acquisition in March 2002, easily beating both the S&P 500 and the Russell 2000 by 141.3 and 68.1 percentage points, respectively:

Source: Bloomberg

The company is very shareholder friendly, having increased its annual dividend for 32 consecutive years. In addition, the company has a long-standing share repurchase program that still has 628,475 shares authorized for repurchase (page 14). With the company’s total shares outstanding at only 10.87 million, the remaining share repurchase authorized equals a significant 5.8% of total shares outstanding. The repurchases are made out of operating cash flow, not debt. In fact, the company’s balance sheet is very strong, with no long-term debt and short-term debt accounts for only 11.7% of total capital

Insiders own 41% of the stock (page 2), most of which is comprised of the 36.5% owned by the Florsheim family. Management definitely has its financial interests aligned with the average shareholder.

Profitability was excellent in the five years prior to the 2008 financial crisis, with double-digit returns on invested capital. Even during the financial crisis the company made money and its return on invested capital never fell below 7.81%. The latest annual return is 8.81% and I’m confident that the company can resume its historical returns in the double digits once the global economy fully recovers.

The stock’s valuation remains reasonable – if not cheap – at an EV-to-EBITDA ratio of 9.75 and its current PE ratio of 15.4 is below the five-year average PE ratio of 18.1.

Weyco Group is a buy up to $29.50; I’m also adding the stock to my Value Portfolio.

Momentum Play: Chase Corp. (NYSE: CCF)

If you’re impressed with the outperformance of Weyco Group compared to the indices since 2002, you’ll be amazed by the outperformance of Chase Corp., an industrial manufacturer of coatings and tapes. The stock’s value has risen more than eight-fold over the past 10+ years, beating the S&P 500 and Russell 2000 by 619 and 546 percentage points, respectively:

Source: Bloomberg

The company was founded in 1946 by Francis G. Chase and his two sons, one of whom was Edward L Chase – the father of the current CEO Peter Chase (age 65) and grandfather of Adam Chase (age 41), the company’s current President and Chief Operating Officer. Peter and Adam collectively own 18.34% of the company (page 2), so they not only have the pride of funning the family business, but they also have substantial skin in the game – assuring proper alignment with the financial interests of the average shareholder.

The company operates in two business segments: (1) industrial materials; and (2) construction materials. The construction materials are branded under the Chase name, whereas the industrial materials are integrated into the branded products of other companies. The breakdown is as follows:

Source: Company 10-Q filing

The company’s products (page 2) are coatings, tapes, laminates, and other “protective materials for high reliability applications.” Although a small company, it has global reach with manufacturing and distribution centers not only in the U.S., but also in Western Europe, China, and Canada.

As of the end of October 2013, the company’s backlog of customer orders was up 20.5 % year-over-year, so it is very successful. In fiscal 2013 the company reported record highs in both revenues and net income (page 15). First-quarter 2014 results were excellent, keeping the good times rolling, with CEO Peter Chase stating:

We had a good start to the 2014 fiscal year. “I am optimistic looking ahead. We are doing so many things to improve our performance in terms of cost, quality, safety and health, and new product development. With a solid management team and a consistent strategy the results will come.

The company’s profitability has recently ramped up, with return on equity of 20.55% in the trailing 12 months exceeding the old high of 20.22% in fiscal 2008. Earnings per share have more than tripled since fiscal 2009 – rising from $0.73 to $2.48.

Debt is reasonable at 34% of total capital and valuation is remarkably inexpensive (given the high profitability) at an EV-to-EBITDA ratio of only 8.6. The company’s PE ratio is also below its five-year average.

Bottom line: Founder-family management with significant insider ownership, combined with high profitability and low valuation, equals future stock appreciation.

Chase Corp. is a buy up to $36; I’m also adding the stock to my Momentum Portfolio.