Guess And Skechers: Time To Buy One And Sell The Other

Includes: GES, SKX
by: Stock Gamer

In this article, I will run you through my comparable analysis for two stocks with a conclusion to buy one and sell the other. Despite that the supporting reasons appear to be compelling, for you as an investor, further research is still warranted on your part before pulling the trigger.

Guess Inc. (NYSE:GES) - Bullish

Shares of GES have dropped 29.73% over the past 12 months primarily driven by investors' concern on the firm's revenue exposure to Europe. Since my first GES article published in May, the stock has rebounded 18.31%. At $28.95 per share, the shares are trading at 5.1x the NTM EBITDA and 10.8x the NTM EPS. Despite the lackluster consensus growth estimates (see below), the GES trades at just 0.8x PEG, implying a discount to the growth potential.

The table below shows my comparable analysis which includes publicly-traded fashion apparel retailers in the US. Although GES is likely to experience little growth over the current and next fiscal years, the company's superior profitability and liquidity position should help the firm weather any temporary demand slowdowns. To justify the current price of $28.95, the relative valuation model requires a 9% discount on both the peer average P/E and EV/EBITDA multiples, suggesting the current valuation is unrealistic as the market is not giving any credits to GES's solid financials.

In addition, GES recently announced a $500M equity buyback program. Along with the 2.7% dividend yield, these shareholder-friendly policies will likely give a solid price support down the road.

Lastly, with the cheap valuations, GES is likely a takeover target given its strong brand recognition, robust free cash flow generating ability, and liquid balance sheet. Potential acquisition stories could provide an additional upside.


SKX shares have experienced a stellar performance by returning investors 47.12% over the past 12 months. At the price of $20.42, the stock trades at very close to its 52-week high of $21.50. The current price is 11.3x the NTM EBITDA and 59.5x the NTM EPS. Consensus estimates predict the revenues to grow at a 2-year CAGR of 1.1% over the current and next fiscal years. EBITDA is forecasted to rise from -$51M in FY2011 to $107M in FY2013, and EPS to increase from -$1.39 to $0.86 over the same period.

Based on the comparable analysis shown below for fashion shoe manufacturers and retailers in the US, SKX shares trade at a lofty valuation. The relative model requires a whopping 181.2% valuation premium on the peer average multiples to arrive at the current price of $20.42. Compared with the peer financial performance, SKX should not deserve such a significant premium, and the market appears to be over-optimistic in the firm's growth prospects.

Bottom line, GES offers a solid margin of safety given its attractive valuations, dividends, and share buybacks. As such, I recommend direct purchase at the current price or using out-of-money put option to establish a position if a slightly lower valuation is more attractive to you. For SKX, the unsustainable valuations and little margin of safety should scare away many value investors.

The comparable analysis tables are created by author and financial data is sourced from company 10-Q, 10-K, press release, Yahoo Finance, YCharts, Wall Street Journal, Thomson One, Bloomberg, CapitalIQ and Morningstar.

Disclosure: I am long GES.