A Sustainable Small Cap: Timberland

This article is part of our Rising Star Portfolios series.

My real-money portfolio's all about social responsibility, so it's fitting that my inaugural buy recommendation should have had corporate social responsibility at its heart for quite some time. This month's pick is Timberland (NYSE: TBL  ) .

The business
The Timberland brand name came into being in 1973, and the company that bears its name formed in 1978, eventually going public in 1987. Timberland is best known as a boot company, but it boots up the SRI spirit, too.

Timberland believes "our business can be a model for both commerce and justice." Its long-standing sustainability initiatives include paid leave for workers to perform community service, and the formulation of its own Green Index to rate the environmental impact and sustainability of some of its products (100% of its footwear will be rated by 2012, versus 14% now), to name just a few.

Furthermore, just last week, Timberland pledged to plant 5 million trees in five years in Haiti and China's Horqin Desert, two areas that have suffered major harm from deforestation.

Timberland's aggressive pursuit of corporate social responsibility as part of its DNA encourages consumers to feel good about buying its products. Its Earthkeepers line of footwear is notably made of organic, renewable, and recycled materials. Better yet, its products are not only socially responsible, but also sturdy and serviceable to boot. (No pun intended.)

The company's best known for its rugged boots, which are aimed at hardcore outdoor enthusiasts and workers. Timberland also makes fashionable boots for women and kids, and it also provides goods under the IPATH, SmartWool, and howies Limited brands. 

Why I'm buying
Clearly, Timberland stock is a great candidate for anybody who's interested in socially responsible investing. However, solid financial metrics back up a purchase of this small-cap stock, too.

Timberland's trading at just 14 times forward earnings. That's as cheap or cheaper than the multiples attached to footwear providers like Crocs (NYSE: CROX  ) , Nike (NYSE: NKE  ) , Steve Madden (Nasdaq: SHOO  ) , and Deckers Outdoor (Nasdaq: DECK  ) .

Timberland's PEG ratio is just 1.09 at the moment, lending more credence to the thesis that this stock is cheap, especially since growth could accelerate for its sturdy footwear, given certain catalysts. A marked improvement in the economy, or greater consumer interest in the company's environmentally centered initiatives and products, could easily give Timberland a boost. 

In another big plus for prudent investors, Timberland's got a sound balance sheet, with $237.8 million, or $4.54 per share, in cash and no debt.

Timberland also has dedicated, founder-led management in the Swartz family. Sidney Swartz is chairman, and his son Jeffrey Swartz is the current CEO.

Risks
Even though socially responsible companies mitigate some traditional long-term risks, no company is risk-free. The incredibly competitive footwear segment is Timberland's biggest threat. Lots of companies vie for a coveted spot on consumers' feet: Crocs, Nike, Steve Madden, Deckers, and Skechers (NYSE: SKX  ) all spring to mind.

Fads can also be a killer in this segment. Crocs may have recently managed to escape the endangered list, but its fall from grace is a good example of how fickle consumers can change a company's growth outlook. Heely's (Nasdaq: HLYS  ) is another great example of a footwear company that endured the ugly side of swiftly changing consumer tastes.

Granted, Timberland's brand is pretty stable. Folks will always hike and work, and they'll always need good footwear to do so. But there's always the chance that rivals could devise ways to steal some of Timberland's market share, or that unexpected events could somehow tarnish the Timberland brand.

While the company's dedicated founders make the involvement of the Swartz family an asset, it can also be viewed as a liability on the corporate governance front. Shareholders who wanted to make changes at the company would face difficulties doing so; as mentioned above, Swartz family members fill both the chairman and CEO roles, and corporate governance fans would rather see an independent chairman. Meanwhile, shareholder votes won't mean much here, since the Swartz family has 73% of the combined voting power of the company's stock.  

My Foolish bottom line
This portfolio aims to look for companies that do well and do good in the world. As one of the pioneers of the concept, Timberland deserves respect from investors for both qualitative and quantitative reasons.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. Click here to see all of our Rising Star analysts (and their portfolios).

Alyce Lomax does not own shares of any of the companies mentioned. Nike and Timberland are Motley Fool Stock Advisor choices. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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  • Report this Comment On November 04, 2010, at 5:12 PM, TMFBane wrote:

    Nice day, today, for Timberland! :)

  • Report this Comment On January 05, 2011, at 8:33 PM, stan8331 wrote:

    I recently opened a small position that's down very slightly. In addition to good financials and a strong position on ethics and social responsibility, Timberland customers seem more devoted than I would have guessed before I started looking at the company. Thinking I may add to the position before waiting too long...

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