Shares of Deckers Outdoor (DECK) have plunged 39.5% over the past 12 months amid growth concerns. The stock valuation has been squeezed to just 10x LTM P/E, very close to its 10-year low (see chart below). I believe a buying opportunity has already emerged as the company's solid fundamentals are more than sufficient to justify the current equity valuations. In this article, I will walk you through my rationales.
I have performed a value analysis including a set of fashion shoes retailers as DECK's comparable peers. DECK's estimated stock value is determined by equally weighting the valuations calculated by five peer average multiples - EV/Sales, EV/EBITDA, EV/FCF, P/E, and P/S.
The following three paragraphs are based on the table shown below:
DECK's revenue is expected to rise by a 2-year CAGR of 11.8% over the current and next fiscal years, compared to the peer average of just 7.6%. The firm's EBITDA and EPS, however, are estimated to rise by the rate of only 1.4% and 1.3% over the same horizon. The low rates are primarily owing to the estimated decreased EBITDA (from $314M in FY2011 to $282M in FY2012) and EPS (from $5.07 in FY2011 and $4.42 in FY2012) in the current fiscal years. But the market predicts a significant turnaround in the next fiscal years as both EBITDA and EPS are expected to rise by 14.3% and 17.7%, respectively.
DECK dominates the peer group in terms of profitability. Almost all of the firm's margin and capital return metrics are the highest in the peer group. The EBITDA, EBIT, and net margins, as well as ROE and ROIC almost double the averages of the peer group.
In addition, DECK also generates a comparable LTM FCF margin and carries no debt. Despite that both the current and quick ratios are below the peer averages, they remain healthy on an absolute basis.
As such, the solid financial performance should warrant a premium stock valuation. Nonetheless, the current price of $45.79 only implies an average discount of 11% to the five peer average trading multiples, indicating there is likely a room for valuation expansion (see below). Assuming a reasonable but still conservative premium of 5%, the estimated price would be 17% higher at $54.
Moreover, the firm's CEO has recently purchased $460K in DECK shares at an average cost of $45.90 in early July, clearly showing his confidence in the company.
On a technical perspective, DECK's 50-day simple moving average has been the price ceiling since the end of 2011 as the shares were not able to completely breakthrough the 50-day SMA after multiple trials. As the stock is currently trading at exactly the 50-day SMA, it appears that DECK may establish its ground above the 50-day SMA quite soon (see below) and a upward price trend may follow.
Bottom line, I encourage investors acquiring the shares at the current price in the light of the company's cheap valuations and strong profitability and liquidity position. Although DECK's earnings potential may be weaker relative to the peer average, the stock trades at the lowest 0.6x PEG, implying a fair margin of safety for investors.
P/E and technical price charts are sourced from Capital IQ, comparable analysis tables are created by author, and all financial data is sourced from Capital IQ and Morningstar.
Disclosure: I am long DECK.