The case for K-Swiss

K-Swiss is a shoe/apparel company that originally made only tennis shoes. They have recently begun to branch out to other types athletic shoes and as a result of the current market buying the stock is almost like stealing.

K-Swiss doesn't have the brand appeal of Nike for sure, but it does have a loyal costumer base. They make a good quality product and thus far have been able to maintain a good profit margin and increase earnings fairly regularly. That alone does not make the stock a good buy, but without it I would be hesitant to purchase even considering the numbers that follow.

K-Swiss has current assets of $334 million of which $209 million is in cash. Current liabilities total $53 million. They have almost no long term debt. That in itself is enough to get me somewhat excited about the company. Because of their debt to equity ratio they are well positioned to weather the storm of our current economy. Looking at last quarters numbers it is apparent that they used quite a bit of cash to do just that. Like many other companies they lost money in the last quarter.

K-Swiss has 34.86 million shares outstanding. Assets minus current liabilities equals $281 million. Cash minus current liabilities equals $156 million. Those numbers divided by shares outstanding gives you $8.06, and $4.48 per share in assets or cash alone respectively. So when you buy a share of K-Swiss you are buying between $4 and $8 of cash depending on how confident you are in the companie's ability to liquidate current inventory and collect on accounts receivable. That's nothing special until you realize that K-Swiss closed at $7.09 per share yesterday. Now the whole picture becomes a bit more clear. At the worst you are paying $2.61 per share (7.09-4.48) for a company that had increased earnings at a rate of 26% per year for the 8 years previous to 2007 (the earnings have decreased for the past two years, but the company hasn't shown a loss until this past quarter). In 2006 K-Swiss had earnings of $2.17 per share and I have no reason to believe that they won't get back there when the economy turns around. If I believe that K-Swiss could easily liquidate their inventory and collect on their accounts payable in the amount shown on the balance sheet then I actually make $0.97 per share (7.09-8.06) as soon as I purchase the stock and the actual business is just icing on the cake.

Could K-Swiss bottom out and go under? Are their numbers cooked like Enron? The answers to these questions could be yes which is why the decision to buy isn't quite as straight forward as I described in the last paragraph, but for me it's a no brainer (though the next little while could make me sick if I watch the ticker each day).