Wednesday, April 19, 2006

Russell Corporation; RML April 20, 2006

Berkshire Hathaway has recently announced that it is purchasing Russell Corporation for $600M. I believe that by learning why Warren Buffett is buying into this company, we could learn about art of investing from the master investor.

Russell Corporation, an athletic and sporting goods company, engages in the manufacture and marketing of athletic uniforms, apparel, athletic footwear, sporting goods, athletic equipment, and accessories for a various sports, outdoor, and fitness activities in North America and internationally. It operates through two segments, Sporting Goods and Activewear. The Sporting Goods segment provides sports apparel, sports equipment, and athletic footwear under the names of Russell Athletic, Spalding, Brooks, American Athletic, Huffy Sports, Mossy Oak, Moving Comfort, Bike, Dudley, and Sherrin. It markets and distributes its products primarily through sporting goods dealers, specialty running stores, department and sports specialty stores, and college stores. The Activewear segment offers basic, performance, and careerwear apparel products, such as t-shirts, sweatshirts and sweatpants, knit shirts, socks, and career wear under the JERZEES and Cross Creek brands through mass merchandisers, distributors, screen printers, and embroiderers. Russell Corporation was founded in 1902 and is headquartered in Atlanta, Georgia.

Date: April 19, 2006
Price per share: $18.32
Market Cap (intraday): 607.93M
Trailing P/E (ttm, intraday): 17.72
Forward P/E (fye 31-Dec-07) 1: 13.47
PEG Ratio (5 yr expected): 0.97
Price/Sales (ttm): 0.42
Price/Book (mrq): 1.03
Enterprise Value/Revenue (ttm)3: 0.56
Enterprise Value/EBITDA (ttm)3: 5.505

Return on Assets (ttm): 4.55%
Return on Equity (ttm): 5.98%

Profit Margin (ttm): 2.40%
Operating Margin (ttm): 6.51%


My calculations:

Enterprise Value (EV) = $1067M

Free Cash Flow
= $4.53M (2005)
= $45.8M (2004)
= $19.3M (2003)

“Normalised” Free Cash Flow
= $23.2M

Therefore, EV/“Normalised” Free Cash Flow = 46

I like to use EV/Free Cash Flow ratio. However, based on this metric, it seems like Warren Buffett is paying a very high price for this company.

Joel Greenblatt, on the other hand, likes to use EV/EBIT.

EBIT = $84.37M
EV/EBIT = 12.6

By using EV/EBIT, we are getting a decent valuation.

However, there are a few things that I worry about.

Things that I worry about this company:

1. Poor ROE and ROA

2. Poor Profit margin

3. EV/“Normalised” Free Cash Flow

I would be gratefully if fellow readers could give me some comments and reasons why Warren Buffett might be interested in this company, which I may have overlooked. Do send me an email:

All the best,
Dah Hui Lau (David)

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