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eople who wanted to buy a pair of
high-fashion Oakleysunglasses in fall
2001 were out of luck if they looked for
them at Sunglass Hut.In August 2001,
Oakley’s biggest distributor announced it
would no longer carry the brand. The
loss of about 25 percent of its sales revenue immediately sent Oakley’s share price down 33 per-
cent to about $12 a share, less than half its 52-week high of $26.56.
Interestingly, however, some analysts considered Oakley stock a good buy despite this sig-
nificant loss of future earnings. They liked Oakley’s diversification strategy. Trading on the NYSE
under the eyeglass-evoking symbol OO, Oakley is known for its innovative approach to eyewear
design. Its products have international appeal to athletes—from skiers and surfers to golfers and
motorcyclists—and to nonathletes who just like the brand’s trendy looks. To counter the loss of
Sunglass Hut, Oakley added Foot Locker and Champs athletic apparel stores to its distribution
channels. Expanded product lines include other high-performance athletic gear, such as apparel,
footwear, accessories, and prescription eyewear. Company executives are also creative; CEO Jim
Jannard conducted the firm’s annual meeting wearing an Oakley specialty product—the Medusa,
a leather helmet with mirrored goggles and braided strands. Wall Street watchers hoped that
Oakley’s iconoclastic style would take the company to new heights, even without Sunglass Hut.
Using the price-earnings (P/E)multiple approachto estimate the firm’s share value, ana-
lysts calculated the share value would be $23.44 (analysts’ average estimated 2002 earnings of
$0.80 a share times the recreational-products industry P/E of 29.3 on December 14, 2001). Said
Eric Beder, an analyst at Ladenburg, Thallmann, “If Oakley can grow at 20 percent a year without
Sunglass Hut, then this stock is worth double what it is now [August 2001] because this company
is just touching the tip of the iceberg with its product lines.”
The new products, retail outlets, and a 20 percent increase in international sales boosted
Oakley’s third-quarter 2001 sales to record levels. In mid-December 2001, Oakley and Sunglass
Hut signed a 3-year agreement to resume their business relationship. With the more optimistic
earnings picture, by late March 2002 the stock valuation increased to $31.19 (analysts’ average
estimated 2003 earnings of $0.97 a share multiplied by a P/E for the recreational products industry
on March 27, 2002, of 32.15), which was considerably above the $17.90 level at which the stock
had been trading.
Stock valuation requires models that bring together cash flows (returns), timing, and the
required return (risk). In this chapter we will examine the differences between debt and equity
capital, describe the characteristics of common and preferred stock, and use several different
valuation models to determine the value of common stock.OAKLEY
OAKLEYSEESITS
WAY TOHIGHERVALUE