**OPTIONS TRADE: Buy the ICON May 2015 35.000 call (ICON150515C00035000) at or under $2.10, good for the day. Place a protective stop loss at $0.80 and a pre-determined sell at $3.80.
by Ian Harvey
February 19, 2015
A company that exceeds earnings forecasts tends to keep exceeding earnings forecasts. Therefore, these companies that keep on delivering better-than-expected results, allows the trader to position themselves before the next earnings report where more upside is expected, due to the fact that they seem to manage to not only exceed quarterly forecasts, but raise forward guidance as well, providing upward momentum to cater for a profitable options call trade.
One such company that certainly falls into this category is Iconix Brand Group, Inc. (Nasdaq: ICON), a brand management company engaged in licensing, marketing and providing trend direction for a portfolio of consumer brands, which is expected to report at any time soon. According to one analysts' forecasts, the consensus EPS forecast for the quarter is $0.53. The reported EPS for the same quarter last year was $0.54.
This is a favorite play for the retail spending sector. Iconix Brand Group growth-through-acquisitions business model has been generating robust free cash flow, which has risen for six straight years. That has fueled a long string of share buybacks.
Iconix has exceeded profit forecasts by at least 10% for three-straight quarters. But its shares have pulled back since peaking last summer, in part due to a copyright infringement suit from Converse sneakers that was filed in December 2014. This allows for a good entry price for the recommended options play.
Iconix Brand Group has a one year low of $32.70 and a one year high of $44.81. The stock has a 50-day moving average of $34.32 and a 200-day moving average of $37.87.
The company has a market cap of $1.698 billion and a P/E ratio of 13.34.
Iconix Brand Group last posted its quarterly earnings results on Tuesday, October 28th. The company reported $0.73 earnings per share (EPS) for the quarter, beating the consensus estimate of $0.63 by $0.10. The company had revenue of $113.80 million for the quarter, compared to the consensus estimate of $111.81 million.
During the same quarter in the previous year, the company posted $0.59 earnings per share. The company’s revenue for the quarter was up 6.2% on a year-over-year basis. Analysts expect that Iconix Brand Group will post $2.76 EPS for the current fiscal year.
With the recent pullback in stock price, ICON stands at an attractive valuation. It is currently scheduled to buy back over $500 million worth of shares over the next 3 years, which, at current prices, represents about a third of its market cap.
The level of cash flows also assures that the company will have no problems servicing its debt.
Iconix stands as a bargain in comparison to other companies with similar sources of revenue from licenses.
In the past 5 years Iconix has grown its revenues, EPS, and FCF in similar fashion yet it is priced at a remarkable discount compared to the other companies. At 13 times earnings and 8 times FCF, the company is severely underpriced for the level of growth it could achieve. A more reasonable P/E at 18 times earnings implies almost an upside of almost 50%. The price target is $50.
Wunderlich upgraded shares of Iconix Brand Group from a hold rating to a buy rating in a research report sent to investors on February 3rd. The firm currently has $42.00 price target on the stock.
“We are raising our rating on Iconix (ICON) to Buy from Hold and reiterating our price target of $42 (approximately 25% above current levels) and our estimates. From its high of almost $45 in early June, ICON has declined over 25% (versus an increase of 2% for the S&P 500), driven by worries over organic revenue growth, no incremental acquisitions, and, in the last month, a short call on ICON from a forensic accounting firm. While we do not deny any of these issues, we believe, with the Peanuts movie looming large, continued material free cash flows, and the return of the lower-end consumer, coupled with our belief that Iconix will complete at least one acquisition in 2015, that the risk/reward in the name has markedly improved and we now recommend purchase of ICON.,” the firm’s analyst wrote.
The company has been the subject of a number of research reports:-
• Analysts at Brean Capital upgraded shares of Iconix Brand Group from a “hold” rating to a “buy” rating and set a $42.00 price target on the stock in a research note on Wednesday, February 4th.
• Analysts at Wunderlich raised their price target on shares of Iconix Brand Group from $42.00 to $44.00 and gave the company a “buy” rating in a research note on Tuesday, February 3rd.
• Finally, analysts at Zacks reiterated a “neutral” rating and set a $35.00 price target on shares of Iconix Brand Group in a research note on Friday, January 9th.
Iconix Brand Group has been given an average recommendation of “Buy” by the ten ratings firms that are presently covering the company, American Banking and Market News reports. Two investment analysts have rated the stock with a hold rating and six have issued a buy rating on the company. The average twelve-month target price among analysts that have covered the stock in the last year is $44.52.
Iconix boasts all the qualities a value investor might look for in a company: an economic moat from its portfolio of brands, quality management, tremendous amounts of cash flow, and little in the way of tangible assets and capital expenditures. With the recent price pullback this is now a growth stock at a value price.
Therefore, based on the facts above the following options trade is recommended…..
**OPTIONS TRADE: Buy the ICON May 2015 35.000 call (ICON150515C00035000) at or under $2.10, good for the day. Place a protective stop loss at $0.80 and a pre-determined sell at $3.50.