The stock of Motley Fool Hidden Gems recommendation Saucony (NASDAQ:SCNYB) has more than doubled since first recommended by the newsletter in August 2003. But with continued good news like record first-quarter earnings in April, it still remains an attractive investment at today's higher valuation.
First-quarter revenue increased 20% over the prior year and net income shot up 63%. Backlog also increased significantly. The company's balance sheet is in great shape, with no debt and $48 million in cash. The sneaker maker recently announced both a special dividend of $26 million and a 25% increase in its regular quarterly dividend in order to return some of the extra cash to shareholders.
The stock has had an impressive run in the last three years -- just shy of a 300% appreciation. Despite this, it still trades 60% below its historical peak from 2000, and the stock is much more attractively valued than key competitors such as Nike (NYSE:NKE) and Timberland (NYSE:TBL). Saucony's enterprise value is 0.6 times revenue and six times earnings before interest, taxes, depreciation, and amortization (EBITDA), compared to Nike, valued at 1.6 times revenue and 11 times EBITDA, and Timberland at 1.5 times revenue and nine times EBITDA. Saucony's valuation is even slightly below Reebok (NYSE:RBK), which Seth Jayson recently recommended as a great value.
Serious runners have extremely strong brand loyalty when it comes to their shoes, and Saucony has an almost cult-like following among them. Because of that, the shoemaker has significant pricing power among its customer base, which results in strong profit margins. In the most recent quarter, Saucony's gross profit margin was above 40% and operating margin was 15%.
While the company stumbled when it tried to use its excess cash to move into other ventures in the early 1990s, the recent increase in the quarterly dividend indicates that management has learned its lesson -- it is now committed to focusing on the core business and returning excess cash to shareholders. As long as that focus remains, the stock still has room to run.
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Fool contributor Salim Haji lives and runs in Denver, Colo., although he does not run in Saucony shoes. He does not own shares in any of the companies mentioned.
