Skechers Surges On Upside Operating Surprise, Still Trades Near Book Value

| About: Skechers USA (SKX)

Introduction: Skechers USA Inc. (NYSE:SKX) is a well-known footwear company that reported sales and earnings upside surprises after-hours on Feb. 13. The stock gapped up and rose 12% the next day. Management described business prospects as strengthening year-on-year in 2013 on the conference call. SKX has a history of sharp, often prolonged surges that have benefited traders throughout its history as a public company.

The company is primarily a wholesaler of its products, which are distributed to numerous retailers. It also maintains retail stores growing Internet sales. It is expanding domestically and internationally.

Aggressive investors may want to look closely at this equity.

Investment case: Skechers went public in 1999. As a public company, it has created several fast-selling, very profitable products, generated large net profits, and then lost momentum. It lost money in 2003 and 2011. Despite that, the company has grown book value at a 16% annual rate for the past 10 years (Value Line data).

No dividends have been paid. This policy has led to some valuation support today for the stock today based on tangible book value (see below).

SKX stock has almost doubled from its January 2012 low. The chart reveals a pattern of higher cyclical lows beginning with its January 2000 low under $4/share. Each of the other three nadirs before the 2012 low was followed by at least a 7-fold move from the low to the cyclical high.


The 3-month chart shows two successive gaps upward associated with earnings releases and forward guidance, which appears bullish to me.


Fundamental considerations: Peak earnings occurred in 2010 at $2.78/share. Sales that year were $41.63/share; the stock peaked around $44.90. The prior cycle's peak earnings were $41.63/share in 2007. Sales peaked that year at $30.41/share and the stock peaked around $38.00.

Thus SKX has sold for more than one times sales per share.

In both 2007 and 2010, the stock peaked at about 2.5-2.9X book value.

SKX is now trading at only about 1.2X book value, with minimal goodwill and intangibles. It is also trading at less than 2/3 of projected sales per share for 2013. There may be upside to the published sales projections.

Skechers was expected to report a modest loss of 11 cents/share in Q4, but instead earned 8 cents/share. Sales also solidly beat expectations. The 8-K and the Seeking Alpha transcript of the post-earnings release conference call are good resources.

SKX ranks in the lowest 15% percentile of Value Line's array of 1700 companies for earnings predictability. It ranks in the lowest 25% for price stability. If operations are fated to improve in a sustained manner, then the volatility of earnings and the stock price could work in favor of shareholders.

What swayed me to buy this latest breakout was the strong financial position of Skechers. The company has stable management that puts its profits into the company's coffers. As of market close on Feb. 14, SKX had a market cap of $1.11 billion, backed by $919 million in equity. Working capital is $648 million. Despite coming off a lost year in 2011 and a marginally profitable year in 2012, SKX receives an above-average B++ financial strength rating from Value Line.

SKX is not well-followed by the analytic community. Yahoo Finance shows only five analysts following it. None are from the large bank-brokers. This consideration allows for sharp upside price action should a powerhouse bank-broker initiate coverage with a "Buy."

The company has improved its operating efficiency recently. Sales dropped slightly in 2012 from 2011, but earnings swung from a $1.39/share loss to a $0.19/share profit. Total sales were $1.56 billion last year. In Q4 2011, sales were only $283 million, and rose substantially to $396 million in Q4 2012. This sales total remains below the $455 million achieved in Q4 of 2010. Since Skechers has been in expansion mode, peak sales and profits could exceed those of 2010, perhaps by 2014 (this is speculation, of course).

There are Class A and B shares; the latter have super-voting rights. Insiders do not, however, have voting control.

Risks: Some of the risks of investing in SKX include the following.

Much of Skechers' success has come from trendy products. This has helped create the choppy profit pattern. Skechers is a small player in the global footwear business, and is expanding internationally. Thus it may be riskier and more difficult for an American investor to own SKX than either a giant such as Nike (NYSE:NKE) or a domestic-only company. All the usual risks with an economically-sensitive company are present. The dual-share class structure may present additional issues for investors.

Summary: Skechers has been a generally profitable, growing footwear company with sharp operational ups and downs. Despite the choppy earnings pattern, the company is financially strong. It may be in the early stages of another growth period. SKX has shown strong relative strength recently, with the 14-day RSI just now reaching 80. The stock is trading far below all of its prior highs, despite rapid growth in the net assets of the company as reflected in tangible book value. Prior cycle price highs in the stock have been at significantly higher price:book and price:sales ratios than the stocks trades at today.

SKX could be revalued upward in the months and years ahead based on its past trading and valuation history. I hold this volatile equity to obtain trading gains over the months or years ahead, and believe it may be worthy of additional research by other investors and traders.

Disclosure: I am long SKX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not an investment adviser. Nothing herein constitutes investment advice.