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Iconix (NASDAQ: ICON ) 's brand portfolio is ranked second only to Walt Disney Company (NYSE: DIS ) . Its operating margin is fat at 60.51% and its PEG is low at .63. The market values it at a 2014 earnings multiple of 13.63. Yet you almost never see it on the CNBC scrawl, although your family is probably wearing or using one of its brands. It's a small cap of $1.28 billion... for now.
Take a look at the labels on your clothes...are you wearing Joe Boxer underwear? Is your little girl dressed for dance class in a Danskin leotard? Raining out? Did you don a London Fog raincoat? Or is your teenager equipped for the soccer game in Umbro gear?
Iconix manages 31 diverse brands ranging from luxury Badgley Mischka to value names Mossimo and Fieldcrest linens. It markets across the range of retail from luxury retailer Neiman Marcus to value giant Wal-Mart.
Their business model is unique in its ability to generate free cash flow, revenue, and diluted EPS at seven year CAGRs of 46%, 42%, and 36% respectively. It has a low risk profile unusual to companies involved with apparel and home fashions. Finally, brands it buys are immediately accretive. As an intellectual property licensor and marketer it has low overhead.
How does this model work? It buys a brand license then markets it for retailers who themselves have the responsibility to source, manufacture, design, manage inventory, warehouse, and actually sell the product. As of the end of June Iconix took in aggregate guaranteed royalties of $800 million. Thanks to this cash stream analysts project 23% five year EPS growth.
Net profit margin comes in at 36.20% above its historical average of 34.50%. Free cash flow is expected at $203-210 million for 2013 and the company has $441 million in cash.
International is now 33% of the brand portfolio, but the company aims for 40% and brand acquisitions going forward will be international. Iconix' crown jewel is the Peanuts brand accounting for 23% of portfolio revenues. The Peanuts brands has 800 licenses and a full length feature film Peanuts movie in collaboration with Twentieth Century Fox is planned for 2015. This Peanuts movie will likely generate additional revenues for its licenses with cross promotions much like that master of marketing, Walt Disney.
Mickey Mouse vs Snoopy
Walt Disney has iconic Disney characters, Marvel superheroes, Lucasfilm's Star Wars, and more under its branding umbrella.The International Licensing Industry Merchandiser's Association has listed Disney as number one global licensor for several years running.
But for all that you will pay more with a forward earnings multiple of 15.90. The yield now is a somewhat paltry 1.20%. Operating margin at 21.07% isn't nearly as impressive as Iconix' nor is the PEG of 1.53.
Disney has been an outperforming stock as investors realized for the price of the media division (films, Disney network, ESPN, and ABC are responsible for the lion's share of revenue and operating profit) they got Resorts and Licensing for free. In the third quarter consumer retail segment revenue came in at $775 million and operating income rose 5% credited to higher Merchandise Licensing business.
At the annual shareholder meeting in March CEO Robert Iger had reason to boast, " In Fiscal 2012, we increased revenue by 3% to a record $42 billion, which led to a record $5.7 billion in net income, up 18% over the year before. And our earnings per share were up 24%, setting a new record of $3.13."
The second runner up
PVH Corp (NYSE: PVH ) comes in as third Global Brand Licensor behind these two. It's less compelling than Disney or Iconix with a .10% yield and valued at a 15.23 forward earnings multiple. Its current trailing multiple is a pricey 30.11.
Well known Calvin Klein and Tommy Hilfiger lifestyle brands generate three quarters of PVH revenues with heritage brands Izod, Bass, Van Heusen, Speedo, Arrow, and Warners taking up the slack. In 2012 Tommy Hilfiger and Calvin Klein drove global retail sales of $6 billion and $7.6 billion respectively. Global licensing revenues of $180 million are expected for 2013 from Calvin Klein clients such as Coty and G-III.
Operating margin is only 11.79% mainly because PVH is less an intellectual property brand manager than Iconix and actually operates more as a retailer and designer. However, its ten year CAGR rate of 16% for revenue and over 20% for EPS is solid.
2013 is expected to be an interim year for PVH Corp as it assimilates Calvin Klein jeanswear and underwear from its purchase of licensee Warnaco. PVH is viewed as a very solid apparel company but its growth profile is not nearly as exciting as Iconix' despite international expansion and sales growth of 33.60% in the latest quarter. Its PEG of 1.43 reflects the 11.90% five year EPS growth rate analysts expect.
The Foolish takeaway
Iconix has a unique business model. This small cap can be a promising addition to a portfolio with its fat margins and high CAGRs. Disney is a worthwhile long term addition to any portfolio but buy after a major box office flop on weakness. PVH is integrating some powerful brands but its business model isn't nearly as intriguing as Iconix.
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