Kontoor Brands, Inc.
Shares Outstanding: 56.9 million
Market Cap: $2.1 billion
Cash: $76.7 million
Interest Bearing Debt: $990 million
Enterprise Value: $3.1 billion
Kontoor Brands (KTB) has run up rather quickly since our initial post on June 18th, 2019. The dynamics of forced selling from large cap mutual funds were clearly in play within the first few weeks of trading, sending the share price from $40.50 on May 9th on the when-issued market, to a low of $25.78 on June 25th. We believe that the stock is fairly valued from an absolute and relative valuation basis and are therefore selling the majority of our position, as we view the margin of safety to be minimal, which increases the risk of the stock.
KTB has reached what we think is fair value at $38.50 today based on the FCFF analysis performed at the time of the initial write-up. Not much has changed within the business since then and management has executed as expected. Additionally, KTB currently trades at 11.30x EV/TTM EBITDA. LEVI currently trades at 11x EV / TTM EBITDA. As we mentioned in the initial write-up, we believe that LEVI should trade at a premium multiple to KTB due to its past growth story. Therefore, we believe that KTB is fairly valued on an absolute basis and relative basis (the LEVI growth story has certainly slowed, as they’re facing some challenges within their U.S. wholesale division).
Our short-term catalyst of the declaration of the dividend held true. Management indicated in the form 10 that they planned on paying out a dividend, but hadn’t officially declared it, so the information was not listed in any financial database. On July 23rd, they declared a $.56 dividend after the market closed. The stock closed at $31.00 on July 23rd and has since risen to $38.50 even after going ex on September 9th.
If you had purchased shares the morning after our write-up was posted and sold at our fair value of $38.50, you would have made a total return of ~41.5% within four months.
We are going to continue to hold a small position in KTB, as it is a very resilient business and the long-term catalysts have yet to play out. Cash paid for interest should decrease within the next four to six years as they pay down their large debt load that was initially taken on to pay VF Corp for the spinoff. This cash flow paid to the financiers of the company should eventually transfer to equity holders if they continue to maintain their 60% target payout ratio. Our current dividend yield on cost is ~7.6%. If we are correct about their future dividend after they pay off their debt, the yield on cost should be ~12%.
We would be very pleased if we can bring three to four of these types of ideas to the table every year. We are constantly on the lookout for opportunities such as this one. We believe that markets are efficient most of the time, yet acknowledge the existence of market anomalies with the expectation that our analysis will be eventually be rewarded.