Kenneth Cole: Iconix Wants to Buy - Brother Runs Company

by Geoff Gannon

Bloomberg reports Iconix (ICON) wants to buy Kenneth Cole (KCP):

Designer Kenneth Cole is in talks to sell the shoe and clothing company he founded to Iconix Brand Group Inc., the licensing company run by his brother Neil Cole, according to two people with knowledge of the matter.

Kenneth Cole and Iconix are both asset light companies. Would Benjamin Graham buy Kenneth Cole? Probably not. Benjamin Graham liked his earning power backed up by assets. Kenneth Cole is asset light and earning power heavy.

Kenneth Cole’s 10-year average real free cash flow per share (adjusted for the current share count) is $1.18. Slap a Shiller P/E of 15 on that $1.18 and you get $17.70. Kenneth Cole has a clean balance sheet. It has $4.67 a share in cash and investments. Current assets are $2.52 a share more than total liabilities. That means at least $2.52 per share of those cash and investments is surplus. Add the company’s $17.70 a share in earning power value to its extra cash of $2.52 and you get an intrinsic value of $20.22. A buyout price of $20 sounds fair. The stock trades at $16.75. That’s a 20% return if Kenneth Cole is sold for $20.

The downside? It’s hard to come up with an intrinsic value estimate under $15 unless you think 2008-2009 sales are the new normal. Fashion is fickle. It’s not my thing. But 10-15 years of solid cash earnings, the buyout report, and the family connection make Kenneth Cole interesting.