Joel Greenblatt (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) both recently added to their Wolverine Worldwide Inc. (WWW, Financial) positions. For those who believe in Wolverine's ability to revamp its brands, at current levels shares seem fairly priced or even underpriced.
Wolverine Worldwide, a maker of branded footwear, has sold from a 2015 high of $33 to around $18 today. Is this an opportunity to add a quality company to our portfolios, or should we let this opportunity walk away?
Is this a quality company?
Of course quality is in the eyes of the beholder. A look at historical fundamental metrics, such as the growth in book value per share and earnings per share, is valuable to add insight.
For a graphic portrayal of past historical data, a F.A.S.T. Graphs subscription is handy. Have a look at the graphic below. Wolverine management has grown book value per share over the past 20 years.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Next is a review of the growth of earnings per share. Again F.A.S.T. Graphs is handy. Please look at the orange line in the graphic below. This line represents EPS at 15X. Using this representation, we can view the long-term growth of EPS by observing the trend of the orange line. My interpretation is that Wolverine has done an impressive job of growing earnings over time and multiple cycles.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
What is management doing to revamp brands?
Wolverine owns some significant brands, including Merrell, Keds, Sperry and Stride Rite. Of course branded footwear is an extremely competitive market. The company has experienced revenue declines recently based on general consumer downtrends, lower demand for work boots (oil and gas industry) and a generally mild winter. Just what are company leaders doing to reverse these trends?
Leadership changes, new talent and focusing on profitable lines continue to be significant company actions. The company has installed new leaders to revitalize brands and also hired new talent to accelerate the recovery. In addition, management is focused on expanding profitable labels and has closed low-margin operations. Investments in marketing are increasing, too.
Are shares attractive at current levels?
Say we believe management will be successful in turning around these brands. Are shares priced reasonably enough now to consider following Greenblatt and Gabelli into a long position in Wolverine?
To get a sense of a company’s valuation, I subscribe to the thinking that a company’s own PE history is a valuable guide. And to gain visual insight, again I turn to my F.A.S.T. Graphs subscription. Using the features of the website I can select for earnings per share (orange line, assumed at 15X earnings) compared to the market price (black line).
From a price to valuation standpoint, here’s where Wolverine’s story gets interesting. Today the PE ratio for Wolverine is 13.7X earnings. I decided to look at previous low points to see what the lowest PEs had been in the past. Have a look at this series of charts:
PE low point of 8.3X
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
PE low point of 12.4X
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
PE low point of 11.5X
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Again, today the PE ratio is 13.7X, and the forward PE using a 2016 EPS estimate of $1.47 is 12.8X earnings.
In other words, the shares are priced about as cheaply now as the past three best entry opportunities since 2008.
A longer-term look at price to valuation
Looking at a 20-year chart, note the relationship between the orange (15X valuation) line and the black current market price line. Again we can easily see the visual to demonstrate likely fair valuation if not undervaluation.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
In a nutshell
Wolverine has a history of strong fundamentals and owns brands with significant value. If one believes in management’s ability to turn around the Wolverine brand popularity, given today's price to valuation relationship, it might make sense to walk in the footsteps of the gurus and add a few shares to your portfolio.
