Is Iconix a Dead-Cat Bounce or a Long-Term Value?

Source: Iconix Brand Group.

Shares of Iconix Brand Group (ICON) have been obliterated in the past year. Embroiled in everything from revenue and debt woes to misstatements of earnings and executive leadership shakeups, the brand licensing company's struggles have sent investors heading for the exits in droves.

Since February, the future has started to look a little brighter. Interim CEO Peter Cuneo, the former head and vice chairman of the board of Marvel Comics before the Disney buyout in 2009, moved to executive chairman of the board. John Haugh -- an executive from Build-A-Bear Workshop, private candy maker Mars, and Aeropostale -- was named CEO and will take the reins starting on April 1.

The company is also wrapping up an SEC inquiry into earnings misstatements from 2014, which were corrected and recently restated. A new $300 million term loan was extended to shore up debt that was coming due in June of this year. And finally, the company announced the $16 million cash sale of its brand Badgley Mischka, the proceeds of which will be used to bolster some of its more profitable businesses.

These news items have led the stock to rebound from a low of under $5 a share to as much as $10. But what's going on behind all of the noise? Is the stock rebound a dead-cat bounce, or is Iconix Brand Group a value going forward?

An overview of the business
Iconix owns or has an interest in over 1,100 brand licenses. These brands include The Sharper Image, Peanuts, Rocawear, and Joe Boxer. Here's an overview of Iconix's key operating metrics from its latest quarterly report:

 Source: Iconix Brand Group quarterly earnings report.

Iconix has a healthy balance sheet. Over the course of a year, revenue-generating assets such as trademarks and investments increased 7.5%, while liabilities increased by 7%. Subtracting out non-revenue generating assets like goodwill, property, and equipment (which totals about $250 million), total assets far exceed liabilities, putting the company in good financial shape. 

Revenue and profit look a little uglier. The company saw sharp drops in both categories, with the 42% drop in profit because of lower operating margins being especially worrisome to investors. Revenue was at $279 million compared with almost $330 million a year ago, and profit was at $72 million compared with $125 million a year ago. This drop reduced the company's profit margin down to 26%. Prior to 2015, the company's profit margin has been in the 30-40% range.

Onward and upward?
So it's been a rough year for Iconix investors. What are expectations from management and analysts going forward?

Source: Yahoo! Finance.

Over the course of the next year, there looks to be lingering worry as investors await the results of the SEC inquiry and whether the company can rebound from the drop in revenue and profit. Revenue is expected to be flat, and earnings look to only rebound at a modest low-single digit pace through 2016.

This worry seems to be priced in, with the one-year P/E about the same as the five-year forward P/E, despite analyst expectations that growth will resume at a 15% annual rate over the next five years. This would imply the five-year P/E being lower than the one-year P/E.  So while short-term angst is weighing down share prices, longer-term optimism is largely being ignored.

This is supported by a look at Iconix's PEG ratio, which measures the price you're paying for expected growth in the future. The higher the ratio, the more an investor is paying for growth, while a lower ratio implies a cheaper cost for that future growth. When factoring an annual earnings growth rate of 15% per year over the next half-decade, the company's one-year PEG ratio of 1.7 drops to 0.4 five years out.

There is yet a lot to wait and see about in the near term. Will the company come out of the SEC inquiry unscathed? Will the debt restructuring be a good long-term solution, or just a short stop-gap one? What direction will the new executive team take the company in? While these issues continue to get ironed out, though, long-term optimism continues to get ignored. It looks to me to be a promising rebound story in the years to come for those willing to be patient.