Reebok's Tread Meets the Street

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Ah, the fickle fairyland of Wall Street. Where else is a miss counted for such a bull's-eye? Yesterday, the world's No. 2 sports shoe joint, Reebok International (NYSE: RBK), announced lower earnings and flat revenues. But because the Street figured things to have been much worse, the stock got a nice 5% boost.

The $0.35 per share represents a 15% drop from the prior year quarter's $0.41. But if you consider the $0.11 per-share charge the company took for the purpose of retiring debt, earnings would have been 12% better than last year. Shareholders (and I'm one of them) will find little to cheer in the 1% decline in revenues -- after accounting for currency fluctuation -- but again, this was something everyone has been expecting.

Reebok clearly hasn't been bounding like smaller peer and Hidden Gems recommendation Saucony (Nasdaq: SCNYB). So why would Tom Gardner recommend the company in the Motley Fool Stock Advisor? For many of the same reasons the firm showed up on my Ben Graham screens a while back. It's the valuation.

The firm trades at a very nice discount to competitor Nike (NYSE: NKE), as well as the market overall, at a P/E of less than 14. For this, you get a firm with a healthy, 14% return on equity, plus a history of copious free cash flow. And that's not all. Things are getting better. This quarter saw a 1.6% improvement in gross margins, with more efficiency projects in the works.

As my Foolish jousting foe W.D. Crotty pointed out toward the end of last month, the firm's acquisition of The Hockey Company was only one of several earnings-enhancing moves made since last quarter's lackluster results.

And the firm knows how to tap into celebrity. Its retro and urban-themed shoes are growing steadily, with the 20% notch-up at classic dwarfed by the monstrous, 350% improvement with the Rbk line.

Priced not far from their 52-week low, Reebok shares are clearly off most investors' radar. But given the firm's strong balance sheet; conservative, profit-friendly management; and prospects for unanticipated growth, this looks like one of those rare chances to get a good company at a great price.

Fool contributor Seth Jayson runs in Mizunos, but owns shares of Reebok. View his Fool profile here.