Description

Weyco Group is a small (1999 sales: $134 million) but prominent
maker of men's dress shoes, established in 1906. This is a well-run company
with very strong brand names. It is highly profitable, throws off
lots of cash (which it uses to buy back stock), and is currently posting
terrific growth in earnings. Despite these strong attributes, the stock is
very attractively priced. It would have to double in order to reach a fair
value.

Operating profits grew 9% annually during 1997-99 (with no boosts from
acquisitions). In 2000, however, growth has picked up to an impressive
rate. Operating profits in the first half were up 19% on a 20% increase in
sales. The reason for the acceleration is that recently-introduced products
have proved to be very popular. Weyco's performance is all the more
remarkable when compared with other shoe companies. The group of shoe
companies owned by Berkshire Hathaway, for example, is currently losing
money.

Weyco outsources most of its production, which helps the company
minimize capital requirements and earn a very-good 20% on operating assets.
(ROA is measured as operating profits as a proportion of assets other than
cash.) Cash flow is so strong that, despite the company having bought back
15% of shares outstanding since the beginning of 1998, and 28% since the
beginning of 1996, cash still totals $26 million, or 27% of assets and 25%
of the company's market cap. There is no long term debt.

I think it's remarkable that a company that's performing so well
should be available at such a bargain price. The business is worth about
$175 million if one capitalizes operating profits of $16 million at 11
times. (The multiple is arrived at by taking the 8% yield on long-term
corporate bonds, calculating its reciprocal, i.e., 100/8, or 12.5, then
trimming it back to 11x for the sake of conservatism. This is the multiple
that an acquirer could pay without incurring dilution on money borrowed at
8%.) Add $6.40 per share of cash to the valuation, and one gets an
indicated value of $200 million, or $50 per share. The current stock price:
26.

Stated differently, I don't know of many noncyclical companies whose
profits were up almost 20% in the latest six months and whose stocks are
selling at less than 5 times EBIT.

There are only 4.06 million shares outstanding, with a float of 2.3
million shares. So it wouldn't take much of a breeze to blow this skiff to
the other side of the river.

Catalyst

Share repurchases, dynamic earnings growth, more publicity in the
investment community, possible management buyout.