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Stock Mart: Maxwell Shoe

With a lot of cash socked away, this company may acquire other brands, initiate a share buyback or be taken private.

Maxwell Shoe


is standing atop a pretty pile of money.

Its cash totals nearly $50 million -- that's two-thirds of the company's entire market cap.

Even though that bundle didn't come cheap, Maxwell's stock sure looks like a bargain.

Investors balked when

Jones Apparel Group


bid for

Nine West

in March. The thinking was that with the largest U.S. shoe company under its wing, Jones would no longer need to pay Maxwell to make shoes under its label. With the Jones business accounting for roughly a quarter of Maxwell's sales and earnings in the most recent fiscal year, investors crushed the stock by more than half. On Friday, shares closed up 1/8 to 9, still well off their 52-week high of 23 3/8 last seen almost a year ago.

Last month, Jones, after closing its acquisition of Nine West, agreed to pay Maxwell $25 million to buy back the shoe license. That sum joins $24 million in cash that Maxwell had on its balance sheet as of April.

Now, there's only the question of how Maxwell will take the money and run. That uncertainty has continued to weigh on the stock, despite the fact that with $5.68 per share in cash, investors are only paying $3.32 per share for Maxwell's core business (based on Friday's closing price). That's below book value of $9.50 a share. Maxwell's price-to-sales ratio, another value measure when less than one, is just 0.48.

"The stock is definitely undervalued," says Steven Richter, an analyst with

Tucker Cleary

who rates Maxwell accumulate. His firm has performed underwriting services for the company. "Whenever you have a major change in a company's business and earnings outlook, the company will need to demonstrate they can grow."

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The Hyde Park, Mass.-based company didn't return four phone calls seeking a comment. But there are three ways Maxwell might step up the pace.

The first -- and most likely -- scenario is that the company will buy one or more small privately held shoe brands.

"The women's footwear business is highly fragmented

in the tiers below Nine West," Richter says. "I've always thought Maxwell would be a consolidator. Now they have the cash and the leverage to do so."

A share buyback may also be in the works, says one investor, who declined to be named. "It's in their plan," he says, adding that the company could buy back some of the 8.8 million shares outstanding and still make an acquisition.

The third -- and least likely -- possibility is that management will take Maxwell private in a leveraged buyout. Officers and directors owned 11.27% of the company as of February, according to Maxwell's proxy statement.

"These guys are good operators," says the shareholder. "But they're not financial guys. And that's why I don't think they'll do an LBO."

If Maxwell fails to put that cash to work fast enough, the stash along with the depressed share price could make the company an attractive takeover target. Maxwell seems to be aware of this prospect and has taken steps to protect its management should a takeover battle ensue. Most recently, Maxwell agreed to award Chief Financial Officer Richard Bakos a severance package equal to twice his total annual compensation should a change of control occur.

Maxwell's management team, led by Chief Executive Mark Cocozza, has thus far shown that it understands the maxim "if the shoe fits..." In the two fiscal years ended October 1998, they doubled the size of the Jones business. The company's other lines,

Mootsies Tootsies

, which accounted for 48% of the company's sales in the most recent fiscal year, and

Sam & Libby

, which made up 10%, have grown as well, although less rapidly.

For the current fiscal year, Richter, the analyst, expects Maxwell to earn 80 cents on sales of $145 million. That compares with the $1.37 a share the company earned last year on sales of $166 million. The current estimates are also down from forecasts at the outset of this year, before Maxwell divested the Jones business. Still, Richter expects Maxwell to earn $1 a share in the fiscal year ending in October 2000 on sales of $130 million, thanks to streamlining efforts. And that's even if the company makes no acquisitions. It's also a 25% earnings growth rate in an industry that's still smarting from oversupply.

"Given that the industry is turning around and Maxwell could buy another brand," the shareholder says, "the stock should trade around 20 in two years."

Another shareholder, who also asked not to be named, puts it this way: "Everyone wants to know what the catalyst will be," he says, adding that even if there is no catalyst, "with more than $5 a share in cash, what's my downside?"