With shares of Timberland (TBL) having tumbled from a high of $41 down to recent lows in the mid-$20s, the stock could make an excellent value play at current levels. Here's a closer look at why we believe Timberland is likely to rebound off its recent lows . . .

Business Overview:  Timberland is a leading provider of specialty outdoor footwear for men, women and children. The company is perhaps best known for its trademark rugged outdoor hiking boots, though it also markets a complete line of casual footwear, including boat shoes, loafers, oxfords, and sandals. Footwear accounts for roughly three-fourths of Timberland's total revenues. The remainder comes from the sale of outdoor apparel and related accessories.

Competitive Advantages:  One of the company's most powerful competitive advantages lies in the Timberland brand itself. Similar to Nike in the athletic shoe category, Timberland has built a reputation for providing high-quality outdoor merchandise that appeals to performance-minded consumers. As a result, the firm has captured around one-third of the outdoor footwear market and is typically able to charge premium prices for its products.

Growth Drivers:  Like many, Timberland has set up shop in a number of fast-growing foreign markets to spur growth. Six years ago, international sales represented just one-quarter of the firm's total revenues. Today, that percentage has jumped to around 55% and is still climbing. Going forward, we expect Timberland's popular brand and expanding retail footprint to continue generating strong results overseas.

Valuation and Outlook:  As the table below shows, Timberland has delivered steady growth over the past several years.

Meanwhile, the shares have barely budged, inching up just +2.8% annually over the last three years -- lagging behind their peer group by more than 13%.

TBL has been particularly weak over the past two months, with the shares plunging around -20% after the company reported soft first-quarter results in early May. By all accounts, it was a difficult quarter: revenues were a little better than flat, same-store sales dropped almost -11%, gross margins contracted sharply, and earnings tumbled -22% to $0.45 per share.

However, while knee-jerk investors dumped their shares on the news, we believe that the recent results are more of a temporary speed bump than a sign of a protracted slowdown. Though the near-term forecast remains challenging (particularly in Europe), the company still has very attractive long-term growth prospects. Driven by continued overseas success, Timberland is expected to generate bottom-line growth of +12% annually over the next five years.

Considering that fashion trends can be fickle and consumer tastes can change rapidly, it is important to be flexible in the product development department. On that front, Timberland has plenty of financial strength ($125 million in cash and zero debt) to ensure that more capital is pumped into designing new products that resonate closely with customers. Not only should this lead to higher demand, but it will also further differentiate Timberland's unique products from the competition.

Based on conservative cash flow growth estimates of +9% over the next five years, using discounted cash flow analysis we have pegged TBL's fair value at approximately $43 per share -- or roughly 35% above the stock's recent closing price. For a financially healthy company with a strong brand name, double-digit profit margins, and superior returns on equity, that margin of safety looks compelling.

Thanks for reading!

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