A Little-Known Stock That's Outperforming Michael Kors

BA is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Perhaps, at some point, you've donned Ocean Pacific surf or swimwear? Kept dry in a London Fog raincoat? Gifted or worn whimsical Joe Boxer products? Bought a cool gadget from Sharper Image? Came across Cannon, Royal Velvet, or Fieldcrest while in the market for towels? This diverse range of brands has one thing in common: They're all owned by Iconix Brand Group (NASDAQ: ICON).

Its other brands include Candies, Danskin, Badgley Mischka, Charisma, Waverly, Mudd, Bongo, Rampage, Mossimo, Rocawear, Zoo York, Umbro, Buffalo, Starter, Lee Cooper, and Ecko. 

License to print profits
Iconix has fat margins -- 60% operating and 32% profit -- because of its business model. It's a brand management company that licenses and markets its brands. It's not involved in manufacturing or retailing, both of which considerably add to a company's costs.

It licenses its brands to retailers and wholesalers for use in apparel, footwear, sportswear, accessories, home and beauty products, and consumer electronics. Its brands range from mass market through higher-end. 

Joe Boxer vs. Michael Kors 
Michael Kors (NYSE: KORS) is a lifestyle brand for "aspiring jet-setters," as it puts it. It sells women's and men's apparel and a wide range of accessories, notably handbags and watches. It has retail, wholesale, and licensing segments. As to licensing, Fossil (NASDAQ: FOSL) is also benefiting from the Kors-mania, as it's been the exclusive licensee of Kors-branded watches since 2004, and the jewelry licensee for a couple years. 

Iconix and Kors, which have different business models, are both heavyweights when it comes to one-year stock performance. However, the sleeper has outperformed the headliner over the past year.    

ICON data by YCharts

We should look at five-year data. We can't do that for Kors, as it's only been a public company since December 2011. 

ICON data by YCharts

Iconix's revenue and EPS growth are fair at 86% and 71%, respectively. More importantly, they've both turned up of late, and margins are increasing. 

Foolish investors know reported earnings is just an accounting measure. Thus, cash flows need to be checked. Ideally, we want cash flows to be greater than reported earnings. Iconix is in great shape here, as FCF has increased 140%, or about twice as much as EPS. 

Iconix's stock price was closely tracking EPS growth for a while, which is often the case. Investors weren't taking the superior cash flows into consideration. Over the past year, the stock price has "caught up" with the cash flow situation. 

Both stocks look far from throwing in the towel

Company

Trailing P/E

Fwd P/E

5-Yr PEG

3-Yr Avg Rev Growth (%)

3-Yr Avg EPS Growth (%)

Net Margin (ttm) (%)

ROE (ttm) (%)

Debt/Equity (mrq)

Iconix

17.8

13.7

0.65

15.1

11.4

32.2

10.9

1.0

Kors

36.8

21.5

1.0

62.5

107.7

18.9

52.9

0

Yahoo! Finance and Morningstar; data to Aug. 9.

Iconix's revenue and earnings were down a bit in 2012, negatively affecting three-year growth figures.

Iconix beat estimates on revenue and earnings when it reported second-quarter results on July 24, making it the fourth consecutive quarter it's done so. Revenue increased 23% due to organic growth and recent acquisitions. EPS surged 62% due to revenue growth, expanding margins, and stock buybacks.

Iconix raised its adjusted EPS guidance to the $2.20 to $2.30 range, up from $2.10 to $2.20. Analysts expect 23% average EPS growth over five years. 

Its strengths are its broad brand portfolio, recent strong growth, fat margins, and low five-year PEG. Its low ROE is a weakness. 

Kors also beat estimates when it reported its fiscal first-quarter 2014 results for the period ending June 30 on Aug. 6. Revenue and EPS surged 54.5% and 79.4%, respectively, while comparable store sales were up 27.3%.

Kors has superb three-year average growth, solid -- and expanding -- margins, excellent ROE, and no debt. And the stock's reasonably priced on a five-year PEG basis.

The drawback? Fashion is a notoriously fickle business. Hot today and gone -- or at least greatly cooled down -- tomorrow. There are exceptions, such as Ralph Lauren's Polo brand, which remains quite popular. Though, overall, Ralph Lauren is struggling of late.

Fossil -- which has a solid line-up of brands of its own -- is another way to get a piece of the hot Kors' action. Fossil is benefiting from strong growth in the Kors brand plus growth in the overall watch industry. Kors' watches generated $400 to $450 million in revenue for Fossil in 2012, according to Cowen & Co. Cowen expects Kors' watches to add more than $550 million to Fossil's coffers in 2013. That's more than 17% of its total revenue, assuming it meets guidance. Additionally, Kors' jewelry is "showing strong growth," as Fossil CEO Kosta Kartsotis said during last week's second-quarter conference call. 

Bottom line
Iconix and Kors both sport attractive investment features. Iconix's strengths are its broad brand portfolio, recent strong growth, and fat margins. Kors' strengths include its incredible growth, solid margins, and clean balance sheet. Both stocks are reasonably priced on a five-year PEG basis.

Investing in Fossil, which is Kors' watch and jewelry licensee, is another way to benefit from Kors' incredible growth, but also get some solid brand diversity.

For a more in-depth look at Fossil, you might like my recent, "Why Can't Analysts Get on 'Fossil Standard Time'?"

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BA McKenna has no position in any stocks mentioned. The Motley Fool recommends Fossil. The Motley Fool owns shares of Fossil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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