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Introduction

The Timberland Company (TBL) is a $1.16 billion company in the footwear industry. Market capitalization competitors in this industry include Sketchers, Wolverine World Wide, and Deckers Outdoor Corporation. The footwear industry is up 16.05% over the past year compared to the S&P 500 which is up 4.24% during the same period. Over the past month, the industry has been up 4.11%, while the S&P 500 has been up 4.13%. After a strong sell-off earlier this year, there is a strong potential for footwear companies to grow. Evidence comes from a potentially strong holiday season and the willingness of consumer consumption. Timberland's growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Timberland produces. According to Reuters, Timberland �designs, develops, engineers, markets and distributes, under the Timberland, Timberland PRO, SmartWool, Timberland Boot Company, Mion, GoLite and Howies brands, footwear, apparel and accessories products for men, women and children.� The business is simple, but profitable. Timberland�s consumers include �independent retailers, department stores, athletic stores and other national retailers.� Moreover, shoes are also sold at special Timberland franchises and online at various websites. What�s most interesting is Timberland�s international exposure. Referring back to Reuters, Timberland operates and sells shoes in the �United States, Canada, Europe, Asia, Latin America, South Africa and the Middle East.� The huge international presence illustrates a wide variety to increase sales. This statement is supported by a dip in the US dollar. As the company is headquartered in New Hampshire, there is a huge potential for these outside nations to export more goods than usual during this time, increasing sales for Timberland.

More specific to Timberland�s actual business, the company operates within two main sectors, footwear and apparel. Beginning with footwear, �the Company offers a variety of footwear products for men, women and children, featuring materials, functional design and components and construction methods.� The majority of Timberland�s footwear is produced for outdoor wear. These products include boots (of various varieties), boat shoes, casual shoes, and sandals. The company also introduced a new waterline footwear service for wet conditions. All these mentioned shoes are for both adults and children.

The next sector of business, apparel and accessories appeals to the rugged outdoor life as well. These products, Timberland produces include socks and accessories (including wallets, watches, and sunglasses) for casual wear. The products are for all ages and both sexes. There is also a wholesale section of this sector for wholesale customers.

Growth

Timberland has a strong growth history. In the past fiscal year, the company reported, according to Reuters, a revenue figure near $1.68 billion. This number is third highest in the industry, meaning sales growth rates will not be as strong as industry competitors. However, Timberland still has a five year average growth rate of 5.78%--a solid figure. Nevertheless, some competitors may question Timberland�s drop in revenue from a year ago. This fiscal year, Timberland reported a sales decrease of 4.06%. In addition, the company reported an earnings decrease of 55.20%. These numbers are not appealing and are probably the main reason for Timberland�s share price drop in 2007. However, there is positive news to come out from these pieces of information. First, both five year averages for revenue and earnings (3.68%) are positive. Therefore, this year�s numbers are not accurate reflections of what Timberland usually produces. Moreover, once these numbers realign themselves to historical familiarity, there is a huge potential for the company to explode share price wise.

Another set of numbers to support this reasoning comes from the company�s margins. Over the past fiscal year, Timberland had gross, operating, and net profit margins of 46.74%, 5.89%, and 3.31%. The industry reported respective average numbers of 45.16%, 14.39%, and 10.29%. Investors may wonder what�s positive with these figures. What�s positive comes again from the five year averages. Timberland has respective five year average gross, operating, and net profit margins of 47.67%, 13.56%, and 8.85%. The industry, however, only has five year respective averages of 42.90%, 12.56%, and 8.08%. These numbers are all lower than Timberland�s numbers. In addition, Timberland�s five year averages are also above the same figures for rivals Sketchers and Wolverine World Wide and nearly identical to rival Deckers. Therefore, just like sales and earnings growth rates, there is large possibility for Timberland�s numbers to realign to prior levels and improve the company�s share price.

The same logic is apparent for Timberland�s ROE. The company reported an ROE of 8.83% last fiscal year. The industry reported an average of 24.79%, however. But once again, the five year average of Timberland�s ROE is 27.58%, while the industry�s average is 20.92%. In addition, Timberland�s five year ROE average is also Sketcher�s five year average of 11.80%, Wolverine�s five year average of 14.99%, and Decker�s five year average of 16.53%. The same idea applies for Timberland�s five year average ROA of 18.60% and the company�s five year average ROI of 8.41%. Therefore, given the growth precedence and growth potential, there is a huge opportunity for this company to improve at these levels and subsequent share price levels.

Valuation

Given the current year�s low earnings results, investors have hurt Timberland�s share price to adjust the P/E valuation. However, there is a possibility investors hurt the price too far. Currently, the footwear industry has a P/E ratio of 20.74 and a price to sales ratio of 2.16. Timberland has a forward P/E ratio of 20.81 and a forward price to sales ratio of 0.81. Compared to rivals like Deckers, which sports a 5.06 price to sales and a forward P/E ratio, Timberland is quite undervalued. Therefore, once investors realize about the potential Timberland has relative to its growth, there is a large percentage for a share price increase.

Efficiency

Timberland is efficient. The company's receivable turnover of 4.80 is respectable compared to the industry�s average. Timberland manages to collect cash from consumers every 76 days. Moreover, inventory turnover is near the industry average at 3.10, and asset turnover is also strong at 1.66. In terms of liquidation, Timberland�s current ratio is 2.38�a good number related to debt and equity purchases. This statistic coincides with the company�s low debt to equity ratio of 0.08. Some investors may question low debt financing considering recently low growth, but high equity percentages have been beneficial to the company before and probably will be beneficial to the company in the future.

In addition, institutions own 80.57% of all Timberland shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Timberland has not performed well in 2007. The company�s share price has dropped 39.80% year-to-date. However, the low amount has some positive implications. There seems to be some support at the 15 dollar share price range. The last time Timberland reached this amount (2003), the company rebounded and appreciated 122%. There is a possibility a similar situation could occur in the future.

More specific to the current month, Timberland illustrates strong technical signals. The 50 day SMA and 50 day EMA have converged after the $15 mark, signaling a support level. Parabolic SAR did recently fall below the market price, but a potential outbreak will boast the SAR upwards, as that�s where it�s trending. The company is a little undervalued compared to the RSI index at 59.21, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Timberland according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Timberland is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise..

-Dennis Biray
December 28th, 2007