Mark Perkins sends: Iconix (ICON) is a $1.2 billion dollar clothing holding company that has such brands as Candie’s, Bongo, Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean Pacific, and Danskin. They have grown extremely well as you can tell from the chart (below). I know most of these brands like Joe Boxer, Rampage, Mudd, Ocean Pacific and Mossimo pretty well and they are all quality names with good niches. The company generates some fat free cash flow and the balance sheet is sound with a current ratio of 7.6. Iconix’s free cash flow grew 103% from 2005 to 2006, and they just killed earnings guidance by $.04/share coming in at $.28 for the 3rd quarter, for 55% year-over-year growth.

Iconix should grow at least 20% a year for a couple more years. Right now from a price-to-earnings valuation they are trading at 21x this years earnings and 16x next years of $1.34, which should easily be met. A small growth stock like this should be worth at least its growth rate so the shares should trade at 20 times earnings. Next year, trading at only 20 times earnings would give us a stock worth $26 a share then. The Street, in an ideal world, would value them like that or even higher depending on the mood. You can see as earnings grow how the stock keeps rising. This will continue. Many companies trade for twice their growth rate and they are way bigger - meaning much slower growers.

Iconix sells for $21 a share now. It rose 20% after they released earnings to $24 a share and fell 7% yesterday. As they continue growing at this rate, I feel there is value in the shares around $20 and buyers should look to pick some up at or below that level.

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