May 2012 has been a dismal month for stocks. The Dow closed trading May 17, down 1.24% on the day, the 11th in negative territory out of the last 12. No stock seems immune from the carnage. Not even highly regarded stocks like VF Corp. (NYSE:VFC), which is off more than 10% in the past month, and has lost ground on 10 of 12 occasions. Suddenly, investors are faced with a decision whether to dump and run or hang in there and ride out the storm. I have no idea how long this latest downturn will last. What I do know is that good businesses like VF always rebound quickly. Sitting more than $20 below its 52-week high, now is the time to be contemplating buying its stock; it's priced to move.

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Post Acquisition
VF now has two quarters in the books since it completed its acquisition of Timberland in September 2011, for $2.3 billion. Clearly it's a substantially larger business, but is it a better one? That can be determined by looking at its first quarter report. Highlights include the following:

  • All five segments achieved double-digit revenue growth in the quarter on a constant dollar basis.
  • International revenue reached 40% of its overall business, compared to 36% in the first quarter of 2011.
  • Asia was especially strong with organic sales increasing 20%.
  • Its outdoor and action sports segment, which represents 49% of its overall business and is the largest of the five, saw organic sales growth of 15%.
  • Direct-to-consumer revenue reached 19% overall, 300 basis points higher than a year earlier.
  • Its balance sheet remains strong with inventories increasing by just 7%, excluding Timberland, and its debt to capital ratio is a very manageable 36.1%.
  • Its earnings before interest and taxes increased 13.2% excluding the Timberland results.
  • It received a positive response from the launch of its Rock and Republic jeans at Kohl's (NYSE:KSS), which it bought out of bankruptcy for $57 million in 2011.

SEE: Analyzing An Acquisition Announcement

Timberland's Contribution
In the first quarter, Timberland's revenues grew 2% to $356 million, while operating income declined 21% to $22 million before acquisition-related expenses of $5 million. VF expects Timberland to contribute $1 billion in revenue growth in 2012 with organic growth in the low single digits. As for earnings, Timberland's expected to contribute $1.10 of the $9.45 in earnings per share this year.

VF is working hard to grow Timberland's revenues while making it more profitable. Timberland has a strong presence internationally and it, along with the North Face and Vans, are its three main growth drivers in the next few years. China holds an exceptional amount of potential for all three brands. This time next year, I'm sure VF will have Timberland humming nicely.

SEE: Understanding The Income Statement

On a trailing twelve-month basis, VF's enterprise value is 11.3 times EBITDA. That sits somewhere in the middle of a peer group that includes Under Armour (NYSE:UA), Nike (NYSE:NKE), Warnaco (NYSE:WRC) and Ralph Lauren (NYSE:RL). It's definitely not sitting in the bargain bin. However, the May swoon it's experiencing has it trading at 14 times its estimated 2012 earnings per share and 12 times 2013. It's increased its dividend for 39 consecutive years and currently yields 2.1%.

This is a stock that's been on a steady climb since the early 1990s, increasing earnings 90% of the time, and share prices long-term generally follow earnings. In addition, it could see free cash flow of more than $1 billion for the first time in its history. It's a cash flow machine and even though I'm not a fan of the price it paid ($148.54) to repurchase two million of its shares at the end of March, it definitely won't make a difference to its future plans.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
VF has a knack for buying good brands and making them better. Its acquisition of Timberland was a rare opportunity that it was smart not to pass up. The pullback, which probably isn't over just yet, presents a good opportunity to own one of the best.

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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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