Source: U.S. Census Bureau, Durable Goods Report

This article is a reprint of my August 19 2008 RealMoney column.

Can a market leader in clothespins hang short-sellers out to dry? Investors in Jarden (JAH) may soon find out. The company has acquired a portfolio of leading brands in outdoor and consumer products that includes Sunbeam, Oster, Coleman, Rawlings and Mr. Coffee. I think these market leaders, sold in a wide range of stores, are generating more than enough cash flow to service debt and fuel additional growth, making life uncomfortable for their considerable short float.

According to its latest 10K, Jarden is now a leader in a variety of categories, including (deep breath) alpine skis and bindings, snowboarding and snowshoeing, baseballs, bats, softballs and gloves, camping gear, cordage, firelogs and firestarters, soft baits, rods, reels and combos, home canning, home vacuum packaging, matches and toothpicks, personal flotation devices, playing cards, boxed plastic cutlery, selected small kitchen appliances, warming blankets and a number of other branded consumer products. (Does that give you an idea of the breadth of their product lines?)

The 2007 acquisitions of K2 and Pure Fishing helped make outdoor solutions the company’s largest business segment. Unfortunately, they also helped saddle the company with $2.8 billion in total debt just as the consumer slowdown began in earnest. Investors headed for the exits, sending the shares down by nearly half since last summer’s peak. Short-interest stands at nearly 23% of the floating shares.

I think the shorts may now be pressing their luck. For example, some investors consider Jarden’s high exposure to Wal-Mart (WMT - Annual Report) a cause for concern. However, judging from last week’s earnings report, Wal-Mart looks like exactly the place to be supplying these days.

Meanwhile, I think the same credit crunch that is giving investors such concern is likely to prove the remedy for their concerns. If Jarden does not have additional access to debt, obviously the debt load won’t get any bigger — and they can use their cash flow to reduce the current debt load while waiting for the market to improve.

And quite a flow of cash it is. Over the last 12 months, the company’s operations generated $402 million in cash flow and required just $89 million to build and maintain productive capacity. The remaining $313 million can be used for anything the company wants. Historically, it has been acquisitions, but in the current environment, I’m betting they will clean up the balance sheet.

Finance theory says there shouldn’t be a difference in the value of a firm based on whether it is financed by debt or by equity. But we all know that theory and reality don’t always mesh. Last year when debt was cheap, the sensible thing to do was to grow by borrowing money to acquire other companies, and that’s what the company did. This year, with the debt load higher by $1 billion, and the market capitalization $1.5 billion lower, the debt/equity ratio is all out of whack. I think nervous investors have taken the market cap lower than is justified by the cash flow, and that each dollar used to repay debt will increase the value of the company by more than one dollar as investor concerns subside.

Without any further growth in cash flow, I think a strong debt reduction effort could increase the market capitalization from $1.9 billion today to at least $2.2 billion next year and $2.5 billion the following. While that would not be sufficient to restore the stock to its previous highs, the 15% annual returns and $33 potential value after two years are well worth the effort. Jarden management did the right thing in last year’s credit environment, which leads me to believe they will do the same in this one.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this column.

This article is a reprint of my 5 August 2008 RealMoney column.

With consumers under duress, it is likely wise to avoid consumer-discretionary stocks, especially those in companies that sell goods that cost thousands of dollars. But few fortunes are made by following conventional logic, and often investors must look for unconventional opportunities that may be unfairly priced. I think Polaris Industries (PII) may be one such opportunity.

Polaris make all-terrain vehicles (ATVs), snowmobiles and motorcycles and markets them — together with related replacement parts, garments and accessories — through dealers and distributors principally located in the United States, Canada and Europe. Its primary competitors include Arctic Cat (ACAT) , Bombardier and Honda Motors (HMC - Annual Report) .

Polaris shares are down 20% over the last year, as investors appear to expect a slowdown in sales and profits. Yet those metrics are rising. Second-quarter sales were up 21%, and earnings were up 16% compared to last year. The earnings beat the consensus estimate by 4 cents, and the company raised its full-year guidance by a similar amount.

Polaris’ strength is being driven by sales of ATVs, which account for two-thirds of total revenue. In particular, the company’s popular Ranger and RZR brands of multi-passenger “side-by-side” ATVs have given the company the top market share in that category. Polaris grew sales of its side-by-sides by more than 50% in the latest quarter, even as the overall ATV industry has been essentially flat. On the recent conference call, investors heard that channel checks indicate continued supply shortages. With the hot side-by-side ATVs in short supply, moderating sales would simply bring supply and demand into balance.

Over the last 12 months, Polaris generated $140 million in free cash flow, measured as cash flow from operating activity less capital expenditures. At 9.8% of the company’s market capitalization, the cash-flow yield represents a healthy premium to the yield on five-year Treasuries. The company has been using its free cash flow to pay out a healthy dividend (the yield is now 3.5%, itself comparable to the Treasury yield) and to buy back shares. From nearly 44 million diluted shares in 2005, the share count has been reduced by nearly a quarter, to less than 34 million today.

Analysts expect the company to grow earnings by 12% per year over the next three to five years, a rate that is well below the rate that can be sustained given the company’s high returns on equity. I think the estimate is a reasonable one. If growth remains in double-digits, as I suspect, then investors won’t continue to require such a high free-cash-flow yield from the stock. Even at a 7% yield, the risk premium over Treasuries would be 100%, a level often cited by value investors as a target premium.

If free cash flow per share rose by 12% next year, and the shares were priced for a 7% free-cash-flow yield, the resulting $65 share price would represent nearly a 48% premium from the current level. Even if it took five years for the valuation to adjust to a 7% yield, total returns would be 15%-20% annually. With that kind of return, I’d be willing to wait for the valuation to correct.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this column.

This article is a reprint of my 31 July 2008 RealMoney column.

On July 23, J.D. Power & Associates cut its 2008 forecast for new light-vehicle sales and said it now expects U.S. sales to hit a 15-year low this year. The new estimate calls for 750,000 fewer cars to be sold than had been estimated as recently as March.

I’m sure that high gas prices are encouraging marginally more use of alternatives such as car-pooling or public transportation, but I also know from experience that those options are not always viable even if desired. Commuting and work schedules vary widely, so finding someone going your way at the time you need is often all but impossible. So I read the decline in new vehicle sales as a different kind of cost-cutting — namely, keeping a perfectly good older vehicle for a little longer. In other words, the average age of a U.S. vehicle is likely to increase somewhat from the current 9.2 years. And, of course, an aging vehicle requires more repairs. Even cost-conscious consumers may decide it is worthwhile to get the car tuned up and eke out an extra mile per gallon. That, in turn, should benefit companies such as Advance Auto Parts (AAP) , Autozone (AZO) and Genuine Parts (CPC) . Of the three, I believe Advance Auto Parts is best positioned for gains.

Advance Notice

Advance is the second-largest specialty retailer of automotive parts, accessories and maintenance items to “do-it-yourself,” or DIY, and “do-it-for-me,” or DIFM, customers in the U.S. Its stores carry a standard 16,000 stock-keeping units, or SKUs, on hand and can access another 80,000 for overnight delivery. In other words, if you need a part, Advance can get it for you. The company reports earnings on Aug. 7 and is expected to earn 72 cents a share for the quarter, though that really seems to be just a guess. Advance seems to alternate between missing estimates in one quarter and beating the next.

The full-year numbers should be more reliable, however, and on that basis Advance Auto is expected to earn $2.66 in 2008 and $2.92 in 2009. Both of those estimates have been revised higher over the last 90 days. The revisions, which are in the 3% range, compare favorably with a 1% increase in estimates for Autozone over the same time period and shrinking estimates at General Parts.

At 15.6 times the current-year earnings estimate, Advance Auto Parts is trading at the low end of its five-year valuation range (its average P/E has been 18.4 times). If the company earns $2.92 per share next year, as expected, and trades at that average P/E, the shares could appreciate by 30%, to $54.

Click here for larger image.

Source: Zacks Research Wizard, compiled by William A. Trent

Given that Advance has been improving its returns on capital, I believe that, if anything, it now merits an above-average earnings multiple. For one thing, the rising returns on investment lead me to believe that the 13.7% consensus three-to-five-year earnings growth forecast is, if anything, conservative. If the growth forecasts are realized, however, and the company returns to its average P/E after five years, the shares could reach $93, for total annual returns of 17.5%.

At the time of publication, Trent had no positions in stocks mentioned, although positions may change at any time.

Zacks Investment Research has provided Stock Market Beat with a complimentary trial subscription to Research Wizard.

This article is a reprint of my 29 July 2008 RealMoney column.

These are tough times for office furniture makers, which have seen their shares fall 20% to 50% over the last year. A difficult economic environment and poor showings from office retailers such as Office Depot (ODP) have investors worried.

Customers, on the other hand, appear relatively unfazed. Last month, Herman Miller (MLHR) kicked off earnings season with a positive surprise. Last week, HNI (HNI) and Knoll (KNL) followed suit. Only Steelcase (SCS) posted disappointing numbers.

The one that looks most attractive to me is Knoll. The company managed to grow sales by 7.5% compared with last year, and its backlog grew at an even faster 9.7% rate. The growth is significantly higher than that of the industry, which is basically flat. Andrew Cogan, Knoll’s CEO, said, “The strategy we embarked on earlier in the decade to diversify our sources of revenue and profits away from a dependence on North American systems sales and to focus on high design content businesses is paying off in a challenging macro-economic environment.”

Better still, it seems that investors haven’t fully grasped the significance of Knoll’s strategic shift. The stock, which traded at $24 little more than one year ago, rallied after the earnings report but remains well off those highs. Analysts are expecting full-year growth of just 4.1% this year and 0.8% next year, suggesting a slowdown is imminent when the backlog growth is saying exactly the opposite.

Unbought Guidance

The skepticism is so strong that while 2008 earnings estimates have gone up only 12 cents in the last 90 days, the entire increase is attributable to the positive first- and second-quarter surprises. The raised third-quarter guidance, I suppose, is free. Meanwhile, estimates for 2009 have barely moved and at $1.63 are actually lower than the 2008 estimates. So we have a stock with decent sales growth and a string of positive earnings surprises under its belt trading at a single-digit P/E. That in itself is enough to spark my interest.

That spark becomes a flame when I see that the company generated $90 million in free cash flow over the last 12 months, or 12% of the market capitalization. With Treasuries yielding just 3.4%, the 850 basis-point premium is enough to compensate me for Knoll’s risk even if the cash flow remains stagnant. The cash flow has been put to a variety of good uses, including last year’s acquisition of Teddy & Arthur Edelman Ltd. for $71 million and the return to shareholders of more than $65 million through dividends and buybacks. The share count is 2 million lower (about 4%) than it was one year ago.

As I see it, Knoll should trade at no less than 10 times free cash flow, even if the growth potential is limited. Meanwhile, I believe the cash flow can grow, possibly in line with the recent growth in backlog. Under those circumstances, I believe the market cap could be closer to $1 billion than the current $750 million. That would represent a $21 share price, or 34% appreciation from the current level.

Disclosure: At time of publication, William Trent owns shares of Office Depot (ODP)

William Trent currently has a short position in put options related to Office Depot (ODP).

In Monday’s video roundup “Best Trades Now: Financials, Medical Suppliers & More” which one is a 10-day earnings reactor?

“They’re [Harley Davidson (HOG)] what we consider a ten-day earnings reactor, meaning within ten days we’re going to see the most price movement for this company…

: In Darren Rovell’s post on Nike’s “Air McFlys,” what Back to the Future “science” term did he quote?

For someone who grew up in the mid-80’s quoting my best impression of George McFly (“No Biff, get your dirty hands off her!” and “Lorraine, you are my density. I mean, destiny.”), it was all about the flux capacitor and dreaming to one day jam like Michael J. Fox did in the “Enchantment Under The Sea” dance.

It made the DeLorean, an utter business failure, the coolest car in the world. Trust me, there wouldn’t have been a DeLorean car show in Gettysburg, Pa., last month had it not been for this movie. Just ask Lauren O’Reilly, an ad executive who has one of the cars and every time she drives it she hears someone screaming, “Jigawatts!”

Though I wouldn’t consider “density” a science term in this instance, “all of the above” was accepted as correct. As for Nike (NKE), it gets high marks for earnings quality in my models.

Guest Blogger Vince Farrell marvelled at Goldman Sachs’ market-moving ability. Who did Farrell say Goldman “unloaded” on?

Yesterday they unloaded on Citi and GM and those stocks got hit. Goldman effect?

As I noted earlier, my strategy has so far been not to be long Citigroup. It gets low marks for earnings quality, price momentum and free cash flow in the models I follow. As for GM, it doesn’t even qualify to run through the models.

Kiplinger’s issued a list of stocks that “Warren Buffett would love.” Name one. (Hint: You’ll find the list on our site.)

They are:

• Tiffany & Co. (TIF)
  The jewelry company’s famous blue box helps make its branding power “virtually unassailable.”
• Paychex (PAYX)
  The payroll-services company has two Buffett faves: a ‘tollbooth’ business model and a ‘float.’  Paychex charges a fee for each payroll check it writes, and it gets investment income from payroll funds for the period between getting the money from its clients and paying it out to the client’s employees.
• Mohawk Industries (MHK)
  While antitrust laws would probably stop Buffett from buying into this strong competitor in the flooring business to his own Shaw Industries, Mohawk beats Shaw in market share and is “better diversified, with a major presence in every type of flooring.”
• Bed Bath & Beyond (BBBY)
  This retailer’s strength lies in its consistent ability to offer a big selection of products in-stock, thanks to excellent inventory management, says Kiplinger’s.
• Fastenal (FAST - Annual Report)
  Buffett likes “boring-yet-reliable” and it doesn’t “get much more boring than nuts and bolts” which is what Fastenal makes. Strong growth and no debt are positives, although the stock is relatively expensive compared to its earnings.

In my models:

• Bed Bath and Beyond shows poor earnings quality.
• Tiffany has high earnings momentum but poor return potential.
• Fastenal has strong price momentum.
• Mohawk has strong free cash flow.
• Paychex shows poor earnings quality.

Full disclosure: In “Stocks Your Dad Would Love,” which of Brent Wilsey’s picks is in his portfolio?

Disclosure:

Brent Wilsey owns shares of Harley-Davidson in his portfolio and those of his family and clients.

Can’t say I agree with that one. I wrote a bearish piece on Harley Davidson (HOG) back in March.