Ever since Finish Line (Nasdaq:FINL) broke off its troubled merger with Genesco (NYSE:GCO) in March 2008, both companies have gone on to post excellent financial results. As part of the legal settlement ending the merger, Genesco shareholders received 6.5 million Finish Line shares. Those shares, if still held through March 9, are up 465% compared to 261% for Genesco's shares. There's no denying Finish Line has had a great four-year run. Genesco shareholders still holding Finish Line stock should continue to do so. Here's why.

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Stock More Expensive

The last time I wrote about Finish Line in September 2010, investors could buy a dollar's worth of earnings (subtracting out cash) for less than $10. Today, you'll have to pay $13.80 for that same dollar in earnings. So, yes, it's more expensive. But you're also getting a much stronger company. Analysts estimate its fiscal 2012 earnings per share will be $1.59. Based on 53.1 million shares, that translates into net income of $84.4 million, a company record. Its trailing 12-month operating margin is 9.4%, 330 basis points (BPS) higher than in fiscal 2010 and 50 BPS higher than in fiscal 2011. Both gross and operating margins are higher than they've ever been. Most importantly, its annual dividend per share has gone from 3 cents in fiscal 2008 to 24 cents in fiscal 2013. It might only be a 1% yield at current levels, but it's better than nothing. Especially when you consider it's achieved a 10-year annualized total return of 10.3%, 670 BPS better than the S&P 500.

Valuation

Finish Line's current enterprise value (EV) is 6.8 times EBITDA compared to Foot Locker's (NYSE:FL) 7.1 times EBITDA. In many ways, the two peers are very similar. They both have a significant amount of cash on their balance sheets with little or no debt. Almost every valuation metric has them side-by-side identical. There's very little difference between them except for the fact that Foot Locker's revenues are four times as large, and Finish Line has higher margins and general profitability. Finish Line's current EBITDA margin is 11.6%, 180 BPS higher than Foot Locker's. Yet, its current valuation suggests investors don't see it this way.

Finish Line and Peers

Company

EV/EBITDA

Finish Line (Nasdaq:FINL)

6.8

Foot Locker (NYSE:FL)

7.1

Genesco (NYSE:GCO)

8.8

Collective Brands (NYSE:PSS)

13.2

DSW (NYSE:DSW)

8.2

Capital Allocation

I've already spoken about Finish Line's 6 cents quarterly dividend, which amounts to approximately $12.5 million annually. The other way in which it returns capital to shareholders is through share repurchases. In July 2008, its board authorized a buyback of up to 5 million shares. By the time the program was replaced in July 2011, it had repurchased 4.7 million shares at an average price of $16.06. That's an additional $75 million returned to shareholders. As of the third quarter ending Nov. 26, 2011, Finish Line has returned a total of $159 million to shareholders in the form of dividends and share repurchases since July 2008. That's a significant portion of its free cash flow over the 40-month period. This is one major reason for its stock achieving positive total returns in seven of the last 10 years. The downside of this return of excess capital is it clearly overpaid for its shares. Trading as low as $3.42 in November 2008, it should have paid less. In the future, I'd like to see them increase the dividend and decrease the share repurchases. At some point its appreciation will come to a grinding halt and the extra dividends would provide something tangible in nature. However, I'm quibbling at this point. At its March 9 closing price of $23.94, despite overpaying, it has made a good return on its investment.

The Bottom Line

With no debt and performing better than it ever has, Finish Line has a good future ahead of it. The question remains whether it will be an independent one. Make no bones about it, private equity is salivating over the thought of owning this business. Whatever happens, its stock should continue to deliver solid gains.

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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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