What do bikes, baby seats, and ready-to-assemble furniture have in common?
A look at the company’s most recently reported results in Q1 2013 does shows us why shares have fallen more than 20% since. The primary concern is simple: Revenue and income both declined in the first quarter. Two other concerns investors should have: Level of acquisitive activity, and international expansion.
My take is that the company is using acquisitions in a reasonable manner, as the more recent acquisitions are international distribution channels for its products, and not new product categories. This should make for faster, more profitable international expansion, but I would pay close attention if management decided to add another product category to the mix; buying growth at any cost. However, with four of the current executives, including the CEO, being founders, I don’t see this as a significant risk.
As to revenues going backwards, It’s reasonable to accept management’s claims of a delayed spring affecting the bicycle season are true, and hurt both revenue and EPS. However, even with Q1’s results being poor, the payout ratio of .32 limits the risk of the dividend being cut. To the contrary, it’s been raised several times since being rolled out in 2007. However, I’d suggest waiting until Q2 earnings are announced in the next couple of weeks before making any move. If growth is still stalled, I’d look elsewhere.
What do hipsters, cowboys, and surfers have in common?
VF Corp (NYSE:VFC) dresses them all, with popular brands like Wrangler, Reef, and 7 For All Mankind under the VF Corp (NYSE:VFC) umbrella. Frankly, there’s a lot to like about this acquisitive clothier. Case in point: There was recent interest in acquiring popular surfwear maker Billabong, but VF Corp (NYSE:VFC) walked away before overpaying. That’s a positive sign for investors who’ve been burned by “growth at any cost” management before.
Earnings announced on July 19 were stellar, with the company beating on both revenue and earnings, and raising guidance for the remainder of the year. The market does have high expectations, as shares are already up over 30% YTD.
However, EPS, now over $10, continues to climb as the company leverages its scale across all its brands, and the dividend (only yielding 1.7% due to the recent run-up) has been increased every year since introduction. With a forward PE of 18 being on the higher side, I’d recommend not going “whole hog” just yet. Consider starting a small position, and if you’re lucky the market will pull back and let you add shares at a lower price. However, as the economy continues to steadily improve, there’s no knowing when a pullback could happen.
What do ice cream cones, running shoes, and an 82 year-old legend have in common?
While any other company with such a diverse interest would be accused of diworsification, the culture at Berkshire Hathaway Inc.(NYSE:BRK.A) makes it work. Don’t minimize the history of only acquiring companies that are led by strong, dedicated management teams, and then leaving them to run their businesses as being central to Berkshire Hathaway Inc.(NYSE:BRK.A)’s success. Buffett himself has stated that he’s said “no” to plenty of offers.
Berkshire Hathaway Inc.(NYSE:BRK.A) is another stock that’s up — more than 32% YTD — but EPS ($6.99 TTM, an all-time high) is also growing at a very fast rate here as well. Price/book, Buffett’s own metric for valuing the company, is around 1.4 today. That’s not a far reach from the 1.2 times target that the company has in place to repurchase shares. And while it’s a post-recession high, 1.4 times isn’t unseemly for the preceding years.
Foolish bottom line
Sometimes, the brands we know and love are owned by a diversified holding company, hiding in plain sight. And sometimes the task of evaluating all the moving parts and brands isn’t worth it to invest in something you don’t understand. However, all of the companies here offer some opportunity. But with all three companies carrying higher valuations than recent history, take time to build your position.
The article Hiding in Plain Sight: Investing in Your Favorite Brands originally appeared on Fool.com and is written by Jason Hall.
Jason Hall owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Jason is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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