Worth Sticking with Velcro?


By Eric Wahlgren While Velcro Industries is famous around the world for its nifty fasteners, Wall Street has never really become attached to its stock. But several investing pros believe the company, which is domiciled in the Netherlands Antilles for tax purposes but has its corporate headquarters in Manchester, N.H., is a smart investment. In particular, these experts believe Velcro (VELCF) is a good value play, meaning they reckon the current price doesn't adequately represent the stock's real worth.

"It has a brand name that's worth a lot," says George Schwartz, president of Schwartz Investment Counsel in Bloomfield Hills, Mich. "Its book value doesn't reflect the true value of its assets." Velcro stock represents about 2% of the holdings of his Schwartz Value Fund, which has about $70 million in total assets.

Schwartz and other Wall Streeters are betting that Chairman Robert Cripps and his family, who together control a majority stake, plan to take Velcro private in the not-too-distant future. Such a move would result in a nice premium for stockholders, experts argue.

"LACK OF LIQUIDITY." In a sign things may be going in that direction, the Cripps last year paid about $16 a share to raise their stake in Velcro to a current 82% -- or 24.6 million shares -- from about a two-thirds holding previously, says Gene Fox, managing director of Cardinal Capital Management in Greenwich, Conn. "They will pay at least that to take out the rest," says Fox, whose firm owns Velcro stock. "They can really do so at any time." Based on Velcro's July 29 price of around $12, an offer similar to last year's would represent a 30% premium.

Meantime, Schwartz believes the stock may be worth as much as $30 a share, or 161% more than its current price. "It really trades at a discount because of the lack of liquidity," Schwartz says. "There just aren't that many people interested in value investing."

While Velcro couldn't be reached for comment, Fox notes that it was holding about $150 million in cash and securities as of Sept. 30, 2003, the end of its fiscal year. Given those resources, it could easily buy back the 5.4 million shares remaining in the public float.

EARNINGS SHORTFALL. Since the beginning of this year, Velcro stock has pretty much flat-lined. That's partly because despite modest sales growth, its operating earnings have shrunk for a variety of reasons. According to Velcro's second-quarter interim report, among those reasons are increasing competition, unfavorable currency translation, and expenses related to the reorganization of certain areas of manufacturing.

In particular, operating income for the first two quarters of fiscal 2004 fell 35%, to $10.9 million, on 2% higher sales of $130.8 million, Velcro said in the May 13 statement. However, net income for the six-month period rose 7%, to $12.5 million, thanks mainly to increases in the value of investments, such as securities.

Fox says he's not concerned by the recent drop in operating earnings. Velcro "doesn't really try to manage earnings," he says. And although earnings have fluctuated, the trend is up, he adds.

"PRICING POWER." What's important, Fox says, is that Velcro continues to expand into new markets and is developing new applications. Sales are growing steadily as a result. For the 2003 year, net income grew 4.5%, to $23.2 million, on 3.4% higher sales of $261.2 million over the previous year. "It's a fabulous business," Fox says. "Velcro is like Kleenex in that its name is synonymous with its products. There's a lot of brand equity in the name, and they have pricing power."

Velcro owes its start to the research of inventor George de Mestral. The Swiss national became intrigued by the cockleburs that would get stuck on his pants after taking walks outdoors. His studies led to the development of a unique two-sided fastener. One side had tiny hooks resembling the burrs and the other side had minuscule hoops like the ones found on the fabric of his pants.

Today, Velcro is a trademarked name that comes from the French velour for velvet and crochet for hook. It's used for everything from fastening shoes and securing carpeting to auto interiors and anchoring equipment on NASA's space shuttle. Velcro's competitors include Japan's YKK and Kuraray. But industry observers say Velcro remains the leader in hook-and-loop fasteners.

QUICK GAINS DASHED? Of course, owning Velcro stock comes with risks. Another company or technology could come along to rival its dominance in the fastener segment. Or, of greater potential concern to investors, insiders might not take the company private, dashing hopes of quick gains.

As for Schwartz, he recently bought Velcro at about $11 in expectation of it being worth far more down the road. "It's a classic value play," he says.

Certainly, Velcro is no pick for growth investors. Given how few shares are in the public float, even strong results likely wouldn't move the stock all that much, investing pros say. And because the stock is thinly traded, analysts don't bother covering it. Value investors, however, may want to consider attaching some Velcro to their portfolios after doing some research. The potential payoff could be a nice portfolio fastener. Wahlgren is a reporter for BusinessWeek Online in Paris


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