Wednesday, November 12, 2014

McRae Posts Second Consecutive Strong Year

McRae Industries reported year end earnings that was flat compared to a year earlier. Both 2013 and 2014 earnings were $7.5M despite a revenue increase from $97.1M in 2013 to $103.6M in 2014. The reason was that margins fell from 70.9% in 2013 to 69.6% in 2014 which negated the $ 6.6M increase in sales. The margin compression was due to higher cost of imported products, and management feels this will continue next year. However, I wonder if management is too pessimistic as the recent higher US exchange rate should lower import costs.

Price $ 31.500
Market Cap 76.55 M
P/E TTM 10.1 x
Div yield 1.7 %
P/BV 1.23
ROE12.1 %
ROIC 18.7 %
The company's two sales segments were both strong. The western/lifestyle products business grew from $62.8M to $66.3M and work segment sales grew from $33.3M to $37.0M. Management foresees both segments continuing their strong performance in 2015. Management expects strong demand in the lifestyle segment which is not surprising considering that the US consumer is coming off five years of deleveraging and high unemployment. As the US economy rebounds in the coming year, consumer optimism will only increase pent-up demand for fashionable items such as boots. The work segment relies heavily on just a few military contracts and so this segment is more predictable short-term. And here management feels the current contracts will give this segment a strong 2015.

At current valuation, the numbers for McRea are quite impressive. The ROIC is 18.7% ! This number shows that the company has a lot of ancillary investments and cash on hand and the company is a lean operation. McRea does minimal advertising, if at all. This means the company cannot drive its growth; it just goes with the flow of the business cycle. I am just happy after an awesome 2013, the company maintained its results in 2014. If the company keeps this up, it will grow book value by $7M a year. Then, they will probably have to give a special dividend. I estimate this company's intrinsic value at $40.

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