Surf's Up at Quiksilver

10/24/2003 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Horizon Publishing's Dow Theory Forecasts  has been published since 1946. Its latest service is Upside, which selects small and mid-cap issues through a proprietary system. For the year to date, its Best Buy List is up 69%. Its latest buy is surf-wear retailer, Quicksilver.

"Despite a tenuous retail backdrop, Quiksilver (ZQK NYSE) has more than held its own. The fast-growing maker of surf-oriented apparel has posted four straight quarters of double-digit earnings growth, while sales growth has topped 30% in each of the last three quarters. Growth prospects remain bright, fueled by the company’s reputation for authentic and innovative apparel and accessories. Quiksilver also makes snowboards, snowboard boots, and bindings. Its products are sold through surf shops, skate and snowboard stores, specialty retailers, and national chains in the US, Europe, and Asia.

"In fiscal 2002 ended October, sales were $705 million, up 14%. Earnings per share rose 31% to $0.77. Since 1993, sales have grown every year and per-share earnings have declined only once. Quiksilver expects fiscal 2003 sales of $949 to $954 million, implying at least 35% growth. Per-share earnings are expected to jump 31% to $1.01. For 2004, management is comfortable with the consensus estimate of $1.18 per share. The stock trades at 16 times current-year profit estimates and 13 times next-year profit estimates. With strong sales and profit momentum, solid growth prospects, and a reasonable valuation, Quiksilver is an attractive holding among specialty apparel makers.

"The company’s finances are in good shape. At the end of the July quarter, cash assets stood at $49 million. Long-term debt was $50 million, or only 10% of total capital. Per-share book value was $7.44, up from $5.60 a year earlier. The stock comes with some risks. Quiksilver faces a host of competition. The company sells to the notoriously fickle adolescent market, where fashion trends can be fleeting. But demographics trends work in Quiksilver’s favor—the teen population is growing almost twice as fast as the total population. And teens have deep pockets. In 2002, it is estimated they spent more than $100 billion. The stock, capable of reaching $19 to $21 over the next 12 months, is rated a buy."

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