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Cherokee Inc. Message Board

  • jimkilcoyne99 jimkilcoyne99 Jan 21, 2010 11:22 AM Flag

    Food for thought

    The bull case for Cherokee
    Bullish arguments for Cherokee abound. There's the company's marquee customer list, headlined by Wal-Mart (NYSE: WMT) and Target (NYSE: TGT). Its clean-as-a-whistle balance sheet. Its enviable 38% profit margin. But if you ask markodegr8 the real reason to own Cherokee, it's the fact that it "pays a great dividend that may be more than its EPS, but I really am expecting earnings to go up and that's why they can keep paying this dividend." (That dividend is $2 per share, or a 12% yield over the trailing 12 months.)

    CAPS All-Star xilef99 agrees that the "good dividend" is the key reason to own Cherokee, but adds that it seems a "fairly risk free business" in general.

    Now of course, no business is truly risk-free. But it's not hard to see where xilef99 is coming from with that assessment. As BillinOmaha describes, Cherokee "doesn't actually make the products that are sold under its many labels; it just collects franchise fees from the retailers that sell them! No factories equals very low overhead!"

    So basically, Cherokee sells an idea (or even better, just rents it out) and cashes the checks. Maybe that's not 100% risk-free (you still need to find customers, and licensees), but as these things go, it's not a bad business at all. It was good enough to earn Cherokee a cool $11.8 million last year, while generating even more free cash flow than that -- $13.1 million. And the stock trades at a trailing P/E of 12.

    Foolish takeaway
    Admittedly, with the U.S. recession still sticking stubbornly around, analysts don't expect to see much in the way of growth out of Cherokee, even over the next five years. But honestly, with a 12% dividend in the bag, how much growth do you need on top of that? Personally, I'd be thrilled to just sit still and cash checks until the recession goes away.

    Just like Cherokee is. And just like you should be, too.

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