Description

Novel Denim Holdings Limited (NVLD) is a low-cost, vertically-integrated supplier of denim, chino, twill and knitted clothing, along with woven and printed fabrics. Novel Denim’s production facilities are in Mauritius, Madagascar, South Africa and China, while its customers are mostly in the U.S. and Europe. Its customers include wholesalers, large retailers, and manufacturers of designer and private label apparel.

Why I own NVLD:

* The company reported quarterly EPS of $.39 last week, beating the consensus estimate of $.36 (versus $.28 last year), as well as 6 month EPS of $.79 (versus $.49 last year) -- $1.59 for the trailing 12 months. For the quarter, there was an 11.2% increase in sales and 36.1% increase in net income. That’s a lot of EPS and a lot of growth for a stock that closed 11/9 at $9.605. These reported earnings did NOT include any contribution from NDP Holdings Limited (recently acquired for $18.97 million in cash), which is expected to contribute 2 to 4 cents to EPS during Oct. '01-March '02 and 15 to 20 cents from April '02-March '03 (Source of projections: www.bharattextile.com/news/news0670.php).

· I suspect that the similarity in names between the company and its acquisition has created confusion which is causing some investors to overlook the future contributions of NDP Holdings Limited.
· Dow Jones inadvertently created more confusion on Thursday when it initially reported the most recent quarterly earnings as $.28 rather than $.39. Another news service emailed me the erroneous figure but did not report the correction.

* Outlook (direct quote from management): "Following the September 11th tragedy, we have been monitoring our markets even more closely and have been more cautious in our planning. However, based on the impact to date, we continue to feel comfortable with our previous objective of at least a 20% increase in net income for the fiscal year, excluding the contributions of our recent acquisition as well as exchange gains or losses."

* I also like that the company is actively buying back its own stock. As of September 30, 2001, it had repurchased 440,300 shares in the open market for approximately $3.3 million (through a $5 million share repurchase program).

* Trailing 12 month P/E of 6.0x is well below its Industry (16.45), Sector (29.1), and S&P 500 (29.9) - (Source of Industry/Sector/S&P 500 data: AOL Personal Finance).
* Trailing 12 month Price/Sales of .60 compares favorably with Industry (.9), Sector (1.1), and S&P 500 (3.6).
* Price/Book Value of .9 is well below Industry (2.75), Sector (2.5), and S&P 500 (5.6) -- Price/Tangible Book Value of .9 is even further below Industry (4.1), Sector (3.7), and S&P 500 (8.1)

* 3 months ago, Montgomery recommended NVLD with a target price in the mid-teens (possibly high teens, I forget the exact figure). On 11/12, Montgomery is sponsoring 1 on 1’s with institutional investors in NYC (per theflyonthewall.com). Since NVLD’s performance has exceeded expectations in the past three months, I can’t imagine that the target price would be (or should be) lowered. Neither can I imagine the outcome of the 1 on 1's being anything but favorable for the stock price.

*Institutional ownership of NVLD is only 32.7% (vs. 45% for its sector) and Montgomery appears to be the only brokerage with coverage. Increasing institutional interest and analyst coverage are likely to send the stock’s price higher in the near term, while the company’s continuing strong financial performance is likely to be a long term catalyst.

In case you were wondering, I’ve only written up a VIC report for one other stock (Singing Machine). I only got a 4.6 rating on it, but I am somewhat consoled by it being up 135% since I recommended it ($12.44 Friday vs. $5.20 on 3/16). And I feel better about owning NVLD now than I did about owning Singing Machine back then.

Catalyst

Subsiding investor confusion re: reported earnings and projected contribution of newly acquired NDP. Increasing institutional interest and analyst coverage. Ongoing strong financial performance.