Beating Buffett

Iconix Brand Group, Inc. (ICON: $12.82) is a brand management company that licenses and markets a portfolio of owned consumer brands. They owns 17 brands: Candie’s, Ecko, Bongo, Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific/OP, Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma, Starter and Waverly. Iconix licenses directly to retailers, wholesalers and suppliers in products ranging from apparel, footwear, sportswear, fashion accessories, home products, decor, beauty and fragrances. The Company’s brands are sold across a wide range of distribution channels, from the discount tier right up through the luxury market.

Iconix was a struggling shoe manufacturer until changing course in 2003 by becoming a ‘brand manager’ that merely licenses well known lines of brand name merchandise that is produced by others. They turned marginally profitable in 2004 after six years of losses and have shown good results ever since.

Here are their per share results from continuing operations as reported by Value Line:

Zacks now sees 2009 and 2010 EPS as $1.21 and $1.27 making the P/E about 10.6x last year’s and 10.1x forward expectations. Those are quite low by historical standards as can be seen in the chart above.

Recent deals include supplying Wal-Mart with their Ocean Pacific, Starter and Danskin lines as well as an agreement to provide Candies and Mudd products to Kohl’s. An international expansion is also underway as ICON took a 50% stake in Iconix Europe with partner The Licensing Company – a European based licensing specialist. They have similar partnerships with firms in both Latin America and China.

Debt is manageable at about 36% of capital and there is no defined benefit plan or preferred stock to deal with.

Value Line is assuming a 15 multiple in figuring their 3-5 year target pricing. I’m a bit more cautious in only looking for a rebound to about 12.5x earnings. Even that more conservative valuation could lead these shares back to almost $16 /share within 12 months. That would bring a gain of about 23% from yesterday’s close of $12.82. Is that a reachable goal? ICON shares actually changed hands at peak prices of $20.40, $24.50, $22.80 and $18.30 during calendar years 2006-2007-2008 and 2009 when fundamentals were less favorable than they are today. Standard and Poors sees current ‘fair value’ as $14.40 /share.

Here’s a nice buy/write play with Iconix for those of you who feel comfortable with that technique:

If Iconix shares merely remain above $12.50 (as they are already) through Aug. 20, 2010:

·       The $12.50 calls will be exercised.

·       You will sell your shares for $12,500.

·       The $12.50 puts will expire worthless.

·       You will end up with no shares and $12,500 in cash.

·       You will have no further option obligations.

That best-case result would be a gain of $2,980/$9,520 = + 31.3% cash-on-cash over the 8.25 month time frame of this trade. That’s pretty good considering that this will be achieved if the share price:

1.     Goes up.

2.     Stays unchanged.

3.     Dips to no lower than $12.50.

What’s the risk?

If Iconix shares finish < $12.50 on August 20, 2010:

·       The $12.50 calls will expire worthless.

·       The $12.50 puts will be exercised.

·       You will be forced to buy another 1000 ICON shares.

·       You will need to lay out an additional $12,500 in cash.

·       You will end up owning 2000 ICON shares.

·       You will have no further option obligations.

What’s the break-even on the whole trade?

On the original 1000 shares it’s their $12.82 /share purchase price less the $1.80 /share call premium = $11.02 /share.

On the ‘put’ shares it’s the $12.50 strike price less the $1.50 /share put premium = $11.00 /share.

Your overall break-even would be $11.01 /share or 14.1% below the trade initiation price.

Summary: 

Iconix Brand Group re-invented itself in 2003 and has successfully morphed into a profitable, growing licensing powerhouse. Sales and earnings have grown nicely despite the slow economic conditions. A rebound to even 12.5 times projected 2010 earnings should provide 20% - 25% gains.

Option savvy investors who buy ICON shares while writing (selling) August $12.50 calls and puts have a good chance for better than 30% cash-on-cash returns over the next 8 ¼ months as this result will be achieved even if the shares rise, remain unchanged or even if they dip back to $12.50. You are protected against loss as long as ICON shares remain above $11.01 through the August 20, 2010 expiration date.

Disclosure: Author is long ICON shares and short ICON options.