Mothers Work a Value Trap? Not Likely

I was trying to figure out what is causing Mothers Work (MWRK) to climb more than 13% today.  All I could find was James Altucher’s Daily Blog Watch, which mentions a blog article by Blogvesting questioning whether Mothers Work is a value trap. Altucher’s Blog Watch is always an interesting read but it’s not really stock price moving news. On top of it all, the blog post mentioned by Altucher is bearish on Mothers Work.

What really caught my attention was that the post by Blogvesting discusses and directly links to my analysis of Mothers Work. I love it that another blogger is challenging my stock analysis. The debate helps me to focus on the weaknesses of my research and improve my overall approach to value investing.  However, in this case, I have quite a few issues with the author’s take on Mothers Work.

First, I want to note that my thesis was not that Mothers Work fell below its intrinsic value because Bear Stearns had a cash crunch.  Blogvesting seems to be under the impression that that was in fact my thesis. I actually bought my position in Mothers Work before the sale of MWRK by Bear Stearns was made public. I also noted that the my main attaction to Mothers Work was based on my observation at the mall that women are wearing clothing styles that are very similar to maternity clothes and that this current style is probably causing sales at Mothers Work to drop temporarily.

Second, I acknowledge that Mothers Work has a considerable amount of debt.  However, given that interest rates were very low for the past few years, loading up on debt to grow a wide moat company was probably a smart move.  The debt to equity ratio is still below one and will likely fall over the next few years.  The debt levels are something worth keeping an eye on but I believe Mothers Work’s debt level is still managable and might even create long term value.

Next, Blogvesting examines the intrinsic value of Mothers Work.  He comes up with an intrinsic value of between $25 and $30 based on a PE ratio of 10-12.  I believe using PE ratios to value companies is the wrong way to go.  Regardless, does an intrinsic value estimate of $25 – $30 per share for stock that has been trading for $18 or less over the past few weeks sound like a value trap?  It doesn’t to me.

The Blogvesting post then goes on to analyze the management compensation at Mothers Work.  I agree with the assessment that management is richly compensated.  I am dissapointed that the founders have given themselves so much salary and stock option compensation.  It would be better if they aligned their interests better with shareholders by having a larger equity stake and using their equity gains as compensation.  It is also interesting to note that the company granted the Mathiases a pension fund in their last 10Q.  This might signal the possibility that the Mathiases are contemplating retiring soon.  This might actually be a good thing if they are replaced with management that is experienced in international expansion.

I also disagree with the Blogvesting’s take that the maternity market is not a growth market.  I think there is plenty of room for Mother Works to grow internationally.  My understanding is that the maternity market is very fragmented and underserved internationally.

In conclusion, I agree that Mothers Work’s management could be treating their public shareholders better.  However, I do not believe that the founders of the company would damage the long term value of the company that they created.  I think many of the troubles the Mothers Work is working through are temporary in nature and that this company’s dominance in the maternity market will continue to generate significant free cash flows into the future. It appears that Mr. Market agrees with my analysis today, but it will take many months to see if I’m really right on this one.  Stay tuned.

Full Disclosure: I own shares of Mothers Work (MWRK).

One thought on “Mothers Work a Value Trap? Not Likely

  • October 12, 2007 at 12:41 am

    Hello, This is just what I was looking for!

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