Put Oxford Industries Back on the Rack

 | Jan 04, 2013 | 12:30 PM EST
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On Dec. 31, Oxford Industries (OXM) board member John Holder bought 1,000 company shares of at an average price of $45.93. According to a filing with the Securities and Exchange Commission, Holder now owns a just under 13,000 shares of the apparel maker's stock directly, so this was a moderate percentage increase in his position. That same day Holder bought shares of Genuine Parts (GPC), where he is also a board member.

It would be easy to say that this insider is merely buying companies where he serves on the board, but this would be irrational. Holder already has economic ties to Oxford, for example, and already benefits from or is harmed by changes in its performance. It makes sense for him to diversify his investments. The general exception would be if an insider such as Holder is particularly confident in these companies, in which case the potential upside would overcome the benefits of diversification; this is why stocks bought by insiders tend to beat the market. However, there was significant insider selling at Oxford in the fourth quarter of 2012; while insider sales aren't generally as informative as insider purchases, for diversification reasons, it is still something to note. Perhaps this insider purchase is the product of casual decision making after all, and shouldn't be taken as a bullish signal.

In Oxford's fiscal third quarter, which ended in October, revenue was 7% higher than the same period a year earlier. Much of this growth came from its Tommy Bahama segment (which generated 57% of the company's revenue), with strong growth in the Lilly Pulitzer division offset by lower numbers elsewhere. Operating income was down slightly, which is somewhat concerning, but because Oxford's interest expenses were not as high as the prior year, earnings rose to $3 million from $1.6 million. In the first three quarters, Oxford generated $1.57 per share in earnings as opposed to $1.35 in the same period a year ago.

The stock has an average daily trading volume of more than 100,000 shares, and along with the price, we would say there is plenty of dollar volume. At a market capitalization of $800 million, Oxford trades at 24x trailing earnings. That is high, though a number of other apparel designers and retailers carry high multiples as the financial community expects higher earnings in 2013. Sell-side analysts seem to agree with investors that there is quite a bit of upside here, as the forward price-to-earnings ratio at Oxford is only 14. We'd hesitate to be quite this optimistic; last quarter's operating income actually declined, with earnings only coming in higher due to much lower interest expenses. It doesn't seem likely that the company will be able to continue to grow its bottom line unless its operations improve. That's possible, of course, and some of Oxford's segments are doing well, but given the current pricing we wouldn't consider it a good buy at least until we see growth in net income that comes from operations rather than financial activities.

It's unwise to imitate this insider purchase. The stock, which closed Thursday at $48.45, has risen slightly since Holder's buy, and a number of other insiders are selling the stock; while this might not indicate anything, it's certainly not a positive sign alongside the questionable operating performance. With a high trailing earnings multiple as well, we believe investors should avoid Oxford.

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