ZQK

[David Randolph]

Today we're buying 6.66% of capital, as usual, in Quiksilver (ZQK) shares. Since there's plenty of liquidity in this stock (it traded $100 M on Friday) we'll buy at or around the open.

Here's the analysis that justifies this recommendation:

«1. Introduction

ZQK came up on my technical filter yesterday. This technical filter searches for stocks with volume above average and above 1 million and a white candlestick on the day.

2. Profile

Quiksilver, Inc. (ZQK) engages in the design, production, and distribution of apparel, wintersports and golf equipment, footwear, accessories, and related products. (complete profile here)

3. Technical Analysis
3.1. All History Chart



ZQK's long term trend is bullish.

3.2. Medium Term Chart



The stock has moved up and down (mostly down) in 2005 and 2006, but lately it is consistently pushing higher. There was a golden cross in November and ZQK looks like it is heading to new all time highs above $18.12.

3.3. Short Term Chart



There was a powerful white candle on Friday, which was due to this news:

Quiksilver Inc. 4Q Net Income Jumps

4. Fundamental Analysis
4.1. Number of Shares Outstanding



There has been some dilution over the years, which no shareholder likes, but not too much. The current market cap on a fully diluted basis is 128.3 million*$15.75 = $2.021 B.

4.2. Liquidity


(the y-axis is "current assets/current liabilities", not "million shares")

Quicksilver's balance sheet isn't strong but I don't see a liquidity problem within the company.

4.3. Revenues


(the y-axis is "million $", not "million shares")

Revenues were up every year for the past 13 years. Let's make a calculus to find what was the average annual revenue growth rate:

126*(X^13) = 2,362 <=> X^13 = 2,362/126 <=> X^13 = 18,746
<=> X = (18,746)^(1/13) <=> X = 1,2529 => X = 25.29%

ZQK shows pretty solid and predictable revenue growth. The sales multiple is $2.021 B/$2.362 B = 0.86. The Textile - Apparel Clothing industry average is 0.78.

4.4. Profits


(the y-axis is "$ per share", not "million shares")

EPS was down a bit in fiscal 2006, but it is expected to rebound to $0.91 in fiscal 2007. This gives me a forward earnings multiple of 17.3. The industry average is 22.

5. General Overview

I truly enjoy ZQK's historical revenue graph. It's a pity the EPS graph isn't so smooth. Anyway, Q4 fiscal 2006 was the strongest in the company's history in revenue and EPS terms. I wonder if with quarterly revenues of more than $700 M now the company isn't able to increase net profit margin on a sustainable basis.

For example, over in Q4 2005, net margin was 5.18%. This latest quarter it was 8.35%. If the historical revenue growth continues at a 25% pace, in 10 years ZQK will show annual revenues of 22 B. If the company is able to sustain a long term net profit margin of 8.35% like it had on the 4th quarter, net income in 2016 will be $1.8368 B, which translates into $14.32 EPS considering there's no additional dilution.

Apply a 20 times earnings multiple and get a $286.4 price per share in 2016. Annual average share price increase would then be:

15.75*(X^10) = 286.4 <=> X^10 = 18.1841 <=> X = (18.1841)^0.1
<=> X = 33.65%.

I like it (I like to see a number above 20% on this long term estimate to consider the stock as an attractive investment) ! ZQK shares certainly are attractive.»

6. Trading Plan

Buy ZQK today at or around the open, 6.66% of equity.

[David Randolph]

ZQK corrected a bit yesterday after that 8% surge on Friday. Now I see it touching support, previous resistance levels, before another leg up.

I'll review some of the fundamentals of this pick on my next update, running short on time now, I'll continue holding ZQK.

[David Randolph]

I said the following:

I like it (I like to see a number above 20% on this long term estimate to consider the stock as an attractive investment) !

But I remember that I read in "Buffettology" that his threshold for the long term EPS growth estimate was 16%. And his explanation for this makes perfect sense, which is:

The general market rose an average of 8% a year for the past 100 years. So he likes to see double of that to consider buying a stock.

This doesn't mean I'm buying ZQK because I want to hold it for a very long term. But this kind of calculus and estimates helps me see if the stock is attractive or not for long term investors, like Buffet and many other institutional investors.

Since I estimate long term EPS growth of 33% for ZQK, I think it definitely fits the criteria.

Technically the stock touched support, previous resistance levels and closed up on the day. I see it closing 2006 certainly above $16.

[David Randolph]

Nothing changed on ZQK, the stock is acting as expected, I'll keep on holding it.

[David Randolph]

Profit taking continued on ZQK. But I still perceive the market action as short term profit taking, the trend continues to be bullish.

Fundamentals are very attractive (as you can read on my initial analysis), I want to continue holding ZQK.

[David Randolph]

This latest quarter for ZQK was the strongest in ZQK's history, as you can see on the quarterly revenue graph below:



EPS jumped a lot too, to $0.51. I wonder if this isn't a structural change to more profitability. You see, Quiksilver used to sell its merchandise on general stores, but over the latest years it has been opening its own stores, which usually translates into higher profit margins.

We'll see about quarterly EPS, gross and net profit margin evolution over the next updates. So far, the more I study ZQK, the more I like it.

I'll keep on holding ZQK.

[David Randolph]

Nothing new on ZQK today. We'll study the EPS, gross and net margins on the following updates, today I need time for the newest stocks at the 3 Stocks on Fire Portfolio.

I'll continue holding ZQK.

[David Randolph]

I'm starting to think that net profit margin (the ratio between net income and sales) is probably the most important indicator for retailers. On the graph below you can see how significant the latest quarter from ZQK was:



ZQK was back to the 8% plus net profit margin. The last time the company did this was in Q1 2005, when it was trading around $18 a share.

I'll continue holding ZQK.

[David Randolph]

I've said we would study gross margin, here's the historical graph:



This is pretty impressive. Stable and very high gross margin around 50%. This is what an investor likes to see.

Technically the stock is slowly, but surely, going to new highs above $16.08.

I'm starting to get more and more respect for stocks above $1 B in market cap as a long term investment. I could think they have less potential, but also the risk is a lot lower. Probably the lower risk compensates the lack of speculative power, and the long term potential ... can still be huge, because the world is a very large place, almost infinite.

I'll keep on holding ZQK.

[David Randolph]

ZQK didn't make it to close 2006 above $16, but that's not important for longer term purposes. It was up 13.8% in 2006, but 2007 will probably be better, as fundamentals improved dramatically over this latest quarter.

I'll continue holding ZQK.

[David Randolph]

Today I'm short on time so updates won't have the usual quality. ZQK was down a bit today, but the trend continues to be up and fundamentals are attractive. Nothing else to do but to keep on holding ZQK.

[David Randolph]

ZQK recovered some ground yesterday. This is a great stock to own for the long term, but it isn't a fast mover, we need to be patient with it. I'll be patient and keep on holding ZQK.

[David Randolph]

Nothing new on ZQK, just leaving the updated chart and saying I'll hold the stock.

[David Randolph]

I think the biggest Quiksilver's competitor is Billabong, don't you agree? I searched for "billabong stock" on google and found out Billabong is a publicly traded company in the Australia Stock Exchange.

Perhaps AussieTrader helps us finding the best website for technical and fundamental information on Australian stocks, I'll ask him that.

I just noticed Billabong's market cap  is $3.5 B (I wonder if this is US dollars or Australian dollars).

ZQK's market cap is $1.87 B.

Technically nothing changed, just a small decline today, I'll continue holding ZQK.

[David Randolph]

AussieTrader gave me a hand but I still couldn't find much information for Billabong (there's a reason why the US markets attract people from all corners of the world).

I have this link for Yahoo Finance Australia: http://au.finance.yahoo.com/q?s=BBG.AX

I'll abandon the pursuit of a comparison between QuikSilver and Billabong. I'll study ZQK from its own fundamentals. This thread already has a lot of information, and I'll add new one as it becomes public.

I'll keep on holding ZQK, a bit of a positive reaction to the short term support today: