Seeking Alpha
Hedge fund manager, research analyst, contrarian, long-term horizon
Profile| Send Message|
( followers)  

Company Profile

Deckers Outdoor Corporation (DECK) designs, markets, and produces athletic and high-end casual footwear. Deckers' primary brands consist of the UGG (87.3% of sales in 2011) and Teva (9.1%) brands, while secondary brands (3.6%) include the Sanuk, TSUBO, MOZO and Ahnu brands. The company sells its products including accessories such as handbags, headwear, and outerwear, to select retailers as well as through company-owned retail stores and e-commerce.

Deckers has been one of the worst performing stocks of 2012. A combination of unusually warm weather and rising sheepskin costs are the main reasons for this bad performance. Currently the stock is trading for around $39/share, down almost 70% from its all-time high of $118.90/share set in October of 2011.

Valuation

Considering how cheap Deckers has become it is no surprise that there are rumors going around whether or not the company should get bought out. I definitely think this is a possibility since Deckers is still a very profitable business, has a strong balance sheet, huge growth potential and owns well-known brands. In this article I will try to come up with what I believe would be a reasonable price a buyer would be willing to pay for the company. Below I list six buyouts that occurred during the last ten years (including two in progress).

Converse (acquired by Nike (NKE) in September 2003)

Sales: $205 million
Valuation: $305 million
Price/sales: 1.5

Reebok (acquired by Adidas (OTCQX:ADDYY) in January 2006)

Sales: $3.79 billion
Valuation: $3.80 billion
Price/sales: 1.0

Umbro (acquired by Nike in March 2008)

Sales: $276 million
Valuation: $582 million
Price/sales: 2.1

Timberland (acquired by VF Corporation (VFC) in September 2011)

Sales: $1.43 billion
Valuation: $2.00 billion
Price/sales: 1.4

Umbro (acquired by Iconix Brand (ICON), expected to close by the end of 2012)

Sales: $262 million
Valuation: $225 million
Price/sales: 0.9

Cole Haan (acquired by Apax Partners, expected to close in early 2013)

Sales: $535 million
Valuation: $570 million
Price/sales: 1.1

Average price/sales = 1.3

By comparison, Deckers is currently trading at only 1.0 times sales (based on a market capitalization of $1.40 billion and 2011 sales of $1.38 billion).

If we use the highest multiple paid, which was 2.1 for the Umbro brand acquired by Nike, we would get a purchase price of $2.90 billion ($79.28/share or 103% potential upside). Some investors may think that this is too optimistic; however, I would have to disagree. According to data provided by Morningstar (MORN), Deckers 5-year average price/sale multiple is 2.6, which is 24% higher than the 2.1 price/sale multiple paid by Nike.

Let's be conservative and use 1.3 times sales (the average multiple paid for the acquisitions I listed above). At 1.3 times sales the purchase price would be $1.79 billion ($49.05/share or 26% potential upside). I think it's very unlikely that shareholders would accept such a low offer even if it is significantly above the current share price. Considering Deckers is a much better company than most of the companies mentioned above, I think that it would deserve a much higher multiple (1.8 times sales or greater) if a buyout offer were to be made.

Fair Value Estimate:

I estimate that a conservative fair value for this stock is approximately $92 per share. In my fair value I forecast revenue to increase at 10% on a ten-year CAGR basis and profit margin to average around 10.4% during the ten-year forecast period. The fair value estimate implies a 10 times forward P/FC multiple. Net debt (including operating leases) is also taken into account, which subtracts about $13/share from the fair value estimate. As of November 28, 2012, the shares were trading around $39/share, which gives us a potential upside of approximately 136%.

All Deckers has to achieve over the next decade is grow its sales at around 10% per annum and maintain profit margins at around 10%. Some investors might find this overly optimistic; however, I would have to disagree. During the last decade the company grew at over 30% per annum and had profit margins that averaged round 14%. When looking at it that way my projections don't seem so crazy.

The company is expanding overseas, is opening additional retail stores, diversifying its UGG product line to make it suitable for wear in a variety of climates and occasions, and the company is diversifying its brand offering by growing its currently owned brands and by acquiring new brands. Investors also must realize that it will not be an unusually warm winter every year and sheepskin costs cannot go up forever. It will take time for the company to recover, but I believe that patient investors will be rewarded.

Conclusion

Deckers is a good business selling for an even better price. While there are risks associated with this investment, I believe that the low valuation, growth opportunities, and the overall popularity of the company's brands far outweigh these risks. For the patient investors the risk/reward ratio looks very favorable, in my opinion.

Source: Deckers Outdoor Corporation Could Fetch As Much As $92 Per Share