One of the places I look for stock ideas is in the holdings of mutual fund managers I respect. Today I'm looking at the Royce Value Fund (RYVFX), co-managed by W. Whitney George, who has been with the fund for 18 years.
When I saw the fund's top holding, however, I cringed. It's The Buckle
- A product or brand that sets it apart from its peers.
- A track record of growing earnings organically, not by acquisition.
- 3 Cash flow in excess of debt service.
- A cash-to-long-term-debt ratio of 0.4 or better.
- A PEG ratio of 1 or below.
After investigating The Buckle, I now understand George's reasoning. Although I haven't set foot in one of its stores, my research told me why this company is different from competitors.
A product or brand that sets it apart from its peers
With my fear of retail, I have to find a differentiated product. Despite having 404 stores, The Buckle looks more like my local mom-and-pop proprietor. It's concentrated in smaller cities and regional malls and is especially focused in the Midwest and Plains states. With only one store in New York City, but 45 in Texas, the stores feel more American Heartland than Urban Sophisticate.
The Buckle focuses on product selections of straightforward goods, augmented by attentive salespeople. In 2008, some 41% of its sales were denim, and another 39% were tops. Their "keep it simple, stupid" approach eschews the superfancy duds that many other retailers are hawking.
Although 72% of sales were of branded merchandise in 2008, management shuffles brand names in and out of the stores depending on their popularity. In a Buckle store, a shopper need not feel overwhelmed. Buckle opts for simplicity, and that goes a long way, quite different from what you'll see at Hot Topic
The Buckle, with its middle-America branding, veers far away from Abercrombie & Fitch
A track record of growing earnings organically, not by acquisition
The Buckle's year-over-year net income grew by 35% and 39% in the past two fiscal years. The latest numbers are on track for earnings growth of 20% year over year, even in this awful economy. That's impressive.
Cash flow in excess of debt service
Over the past four quarters, The Buckle managed $152 million in operating cash flow and had to pay no interest. In fact, the company hasn't had any long-term debt in at least the past decade and has been financing growth strictly from operational cash flow.
A cash-to-long-term-debt ratio of 0.4 or better
No long-term debt at The Buckle makes meeting this criterion a slam dunk.
A PEG ratio of 1 or below
The company's PEG is 0.60, based on next year's earnings. I choose companies with PEGs of less than 1, because I think the market is undervaluing those companies' ability to grow. In this case, it may be by as much as 40% undervalued. Although the PEG ratio is intended only as a guideline, it's a guideline that has done right by me.
In many ways, The Buckle feels like one of those companies that has grown based on word of mouth and cautious, reasoned expansion. Here is a company that bucks the curse of retail by having created a niche brand. It isn't trying to conquer the world. It's focusing on just one arena and doing it extremely well.
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