|Shares Out. (in M):||74||P/E||10.6x||9.7x|
|Market Cap (in $M):||970||P/FCF||7.6x||6.5x|
|Net Debt (in $M):||374||EBIT||158||193|
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I recommend a long position in Iconix (ticker ICON), the second largest licensing company in the world with around $10 billion of underlying retail sales. ICON was written up in late 2008, during the credit crisis, by baileyb, and his writeup is worth reading. At that point, the stock was screamingly cheap (along with many other stocks) at around $9.00. Although ICON is up over 40% since then, the world has obviously improved greatly, the business has improved and de-levered, and credit markets have improved to enable acquisitions and recharge the prior growth story. As a result, I think the risk/reward may be even more favorable, and I see roughly 100% upside over the next 2 years to $26 per share. At around $13, ICON offers the chance to purchase a very high quality business at a juicy 15% free cash flow yield (despite limited leverage of less than 2x net debt to EBITDA). And, with the acquisition model poised to ramp up again, I think ICON provides strong growth prospects and FCF yield at a value price.
Given the sizeable Mark Ecko acquisition announced early November, 2009 numbers understate the EBITDA generating power of the Company by around $20 million. 2010 numbers are therefore appropriate, and it should be noted that 2010 numbers assume virtually no organic growth and essentially equal the 2009 numbers plus the roll-on of the acquisition. No additional future acquisitions are assumed.
I think a major issue for the stock is that the sell-side analysts group ICON in with more traditional operating companies, are too focused on P/E and EBITDA (not the best metrics for ICON) and seem uncomfortable assigning a premium multiple for the higher quality business model. Many sell-siders do not even include a cash flow statement in their models.
Also, this is a stock that traded for 20x earnings or more pre-credit crisis, then fell to serious value territory. Despite a healthy cash balance and enough "dry powder" to do $350 million of 100% cash-funded acquisitions over the next year (cash on hand + free cash flow), the market is not currently assigning any value for that potential growth. As a result, I think we are getting a growth company at a value multiple, and given the low risk inherent in the ICON acquisition model, I am willing to assign some value to that future growth. (But to be clear, even in the absence of future acquisition growth I think you make money from here.)
ICON would trade at $20 with a 10% FCF yield, as it now generates around $2.00 per share of FCF. If ICON were to successfully execute typically accretive acquisitions funded with a reasonable cash and debt balance, 2011 FCF could easily approach $200 million or $2.70 per share, leading to a $26+ stock price at a 10% yield.
|Capital Structure||Est. 12/31/09||Valuation on 2010 Numbers (estimates per Lazard 12/22 Report)|
|Share Price||$ 13.09||P/E Multiple||$ 1.35||9.7x|
|FD Shares||74.1||EBITDA Multiple||197.5||6.8x|
|Equity Value||969.6||EBITDA less Capex Mult.||193.5||6.9x|
|Total Debt||574.3||Free Cash Flow Yield||150.0||15.5%|
ICON's historical and projected 2010 financials illustrate the beauty of the business model, with almost unprecedented profit margins and almost zero capex requirements. FCF exceeds net income due to a combination of recurring factors: tax shield afforded by faster intangible amortization for tax purposes, non-cash interest expense, and stock-based comp. The historical numbers are per Factset, and the projections are primarily from Lazard. Note that the 2010 numbers are slightly higher than management guidance, as given the recent earnings miss management is viewed as being quite conservative at this point.
|SG&A (incl D&A)||24.7||44.3||73.8||76.5||86.9|
|% of Revenue||30.6%||27.7%||34.0%||33.4%||33.3%|
|% Margin||49.3%||65.3%||68.2%||72.9%||77.8%||Note margin higher due to equity income|
|Diluted Operating EPS||$ 0.57||$ 1.01||$ 1.14||$ 1.24||$ 1.33|
|% of Revenue||0.9%||0.1%||2.9%||1.0%||1.5%|
|Free Cash Flow||42.4||100.6||109.5||128.5||150.0||Calculated as Funds from Ops less Capex|
Clearly ICON has been an acquisition machine historically, and those acquisitions have been the primary growth driver. Organic revenue growth is not formally disclosed but is sometimes discussed on earnings calls. I have organic growth of 5% in 2007 (including 11% on DTR relatinoships), flattish in 2008, mid single digits in 2009 (after thinking organic growth would be quite weak at the beginning of the year it came back strong), and projected at "low single digits" for 2010. Organic growth continues to be driven by the growing DTR segment which has proven very successful for both ICON and retailers (as discussed below).
So, why does the Company trade where it currently does?
Additional accretive acquisitions that underline growth story, leading to a multiple re-rating.
Earnings beats versus conservative forecast, and company is upgraded out of the penalty box by sell-side analysts.
Value creation from FCF generation (15% per year).
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