Is The Buckle Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what The Buckle's (NYSE: BKE  ) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Buckle's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Buckle's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Buckle's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Buckle managing its resources well? A company's return on equity should be improving and its debt-to-equity ratio declining if it's to earn our approval.

Healthy dividends are always welcome, so we'll also make sure that Buckle's dividend payouts are increasing, but at a level that can be sustained by its free cash flow.

By the numbers
Now, let's take a look at Buckle's key statistics:

BKE Total Return Price Chart

BKE Total Return Price data by YCharts

Passing Criteria

3-Year* Change 

Grade

Revenue growth > 30%

25.7%

Fail

Improving profit margin

2.4%

Pass

Free cash flow growth > Net income growth

64.6% vs. 33.1%

Pass

Improving EPS

23%

Pass

Stock growth (+ 15%) < EPS growth

94.7% vs. 23%

Fail

Source: YCharts. * Period begins at end of Q3 (October) 2009.

BKE Return on Equity Chart

BKE Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

17.3%

Pass

Declining debt to equity

No Debt

Pass

Dividend growth > 25%

88%**

Pass

Free cash flow payout ratio < 50%

20.7% 

Pass

Source: YCharts. * Period begins at end of Q3 (October) 2009.
** Special annual dividend alters calculation. Growth is from Q4 2010.

How we got here and where we're going
Buckle picks up seven out of nine possible passing grades, which is pretty impressive in an industry with few genuine winners of late. The company only very barely misses out on another point with good-but-not-great revenue growth, but it's the discrepancy between the stock's growth and its EPS that you may want to keep an eye on. Today, Buckle's P/E is a very modest 13.1, but if this trend continues, the company might find itself with a valuation beyond its norm. What can Buckle do to keep itself on the right track and avoid a painful regression to the mean?

Fool contributor Andrew Marder has been a big proponent of the company, arguing that Buckle's steady growth strategy is more sustainable than that of other fast-expanding clothing companies, particularly True Religion (Nasdaq: TRLG  ) , which competes in the same high-end jeans segment and which has been opening stores at a much faster rate. He also points out that the company's management is stocked with career Buckle employees who know the company inside and out. These leaders have shepherded Buckle through the choppy waters of fashion since the 1970s, and have maintained impressive special dividend payouts for years without cutting into the company's cash hoard.

Buckle was once one of the cheapest apparel stocks on the market, but its strong performance in recent years has pulled its P/E in line with its peers. In one regard, however, Buckle clearly stands out. See if you can spot the difference:

Company

P/E Ratio 

Price to Free Cash Flow Ratio 

3-Year Free Cash Flow Growth 

The Buckle

13.1

11.7

64.6%

True Religion

13.2

17.0

(30.1%)

The Gap (NYSE: GPS  )

15.6

12.6

(1.8%)

Guess? (NYSE: GES  )

11.4

10.2

(6.9%)

Abercrombie & Fitch (NYSE: ANF  )

36.3

25.0 

(41.8%)

Source: YCharts.

Buckle is a rare standout that's actually growing its cash flow in an industry that's been largely unable to do so. It may not be as cheap as Guess or as large as The Gap, but Buckle has outperformed both rivals for some time on one of the most important metrics for dividend investors. That fact should stand Buckle in good stead, both as an apparel investment and as a dividend holding.

Putting the pieces together
Today, Buckle has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Slow and steady might win the race in Aesop's fables, but investors should also be on the lookout for stocks that have the wind at their backs and brisk momentum ahead. The Motley Fool's exclusive free report on "Three Companies Ready to Rule Retail" offers you a trio of great options that can make a great retailing-stock combination with Buckle in your portfolio. Want to learn more? Click here for the inside scoop, at no cost.

Keep track of Buckle by adding it to your free stock Watchlist.


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