Friday, June 7, 2013

McRae Industries Reports Third Quarter Earnings up 46%

McRae Industries (MCRAA) reported revenues up 22% and earnings up 46% from the same quarter a year ago. Operating margins were the same as a year ago, but SG&A expense was 18.6% of revenue this quarter versus 21.4% a year ago. This made the difference in the tremendous improvement in earnings.

The company earned $1.3M in the quarter. In each of the first and second quarter the company earned $1.9M. I consider the drop in earnings acceptable. From what I hear about earnings this year, companies that sell domestically have outpaced the market as a whole. That would explain McRae's outstanding results this year. Consumer sales now account for about 2/3 of sales. McRae's biggest product is women's cowboy boots. And the recession's effects must have depressed earnings last few years. But this year they appear to be back in a big way. The earnings for the first 3 quarters are $5.1M. Projected over the year that is $6.9M. The company market cap is approximately $54M, for a PE of 7.8!

Granted women can be fickle and earnings could go south very quickly. But with the end of the recession (hopefully) and consumer confidence back I think the upside is much greater than the downside. Furthermore, the balance sheet offers protection for the investor. The following chart shows their balance sheet numbers:

The company is a netnet and it is earning good money, money which goes straight into making a bigger and bigger netnet! My intrinsic value on this stock is $32. It trades at $22.35 today.

How McRae Reports EPS

The company's financial statements are straightforward, except for the EPS calculations which has myself and otcadventures stumped. But today I finally solved the mystery by speaking with Marvin Kiser, the CFO. Marvin explained to me that the formula for the EPS calculation came from the SEC and was blessed by their auditor. So they just go with it.

The cause of the EPS anomaly comes from the treatment of the class A and class B shares. The class B shares are the big voting shares, and they are like preferred shares and they mostly lies in the hand of the insiders. Class A is what us common folk own. There are about 5 class A shares for each class B share.

The reported basic and diluted class A EPS is:

Now if you think like me, the reported EPS just makes no sense. Is the dividend somewhere in the income statement as an expense? No it isn't. So, it appears the reported EPS is double counting the dividend amount, which was $0.09 last quarter. Go figure!

From now on, I will ignore the company's reported EPS and use my own EPS, as I have given above as the net income divided by total class A shares. But it isn't a big deal, as the EPS has no real bearing on the shareholder's bottom line. What really matters to the shareholder is his dividend and his share of the equity.

McRae Industries is one of my largest positions.

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