Why Steven Madden Is A Good Investment

| About: Steven Madden, (SHOO)

Summary

Steven Madden is a US-based apparel company that designs, develops and markets fashion footwear and accessories for men, women and children.

The current ongoing fiscal year’s earnings growth is expected to be around 10% and the next five years earnings growth rate is expected to be 12%.

Steven Madden looks fundamentally a solid company that is generating good wealth for its capital providers.

The valuation of the stock suggests that it is undervalued and offers an upside potential of over 18% to achieve the target price of $42 in the next 6-to-12 months.

The technicals support the fundamental valuations as well as the investment thesis.

Investment Thesis

Despite the fact that the stock of the Steven Madden (NASDAQ:SHOO) has appreciated over 17% in the last year, it still has the potential to achieve similar performance in the next year based on the robust business fundamentals, strong financial position, a decent double-digit expected earnings growth rate in the next five years, and the cheaper valuation as compared to its industry peers.

Source: Bloomberg

Business Overview

Steven Madden is a US-based apparel company that designs, develops, and markets fashion footwear and accessories for men, women and children. It operates its business under various formats including its own well-recognized brands, licensing to other brands, and designing of products for many private labeled retailers.

The company reported its third quarter financial results with net sales slightly declined from $413.5 million to $408.4 million. However, gross profit improved 1.8% to 37.8% from the same period last year. Additionally, the earnings per share expanded to $0.74 as compared to $0.70 in the corresponding period last year. Part of this success was attributed to company's women's wholesale division which recorded double-digit growth in net sales revenue. Steven Madden has a stable and growing business, as shown in the below graph, in terms of revenues and cash flow generation capabilities. The company is satisfied with the performance results despite the very challenging retail business environment and tough competition from other major retailers in the footwear industry. The Chairman and CEO of the company, Edward R. Rosenfeld, commented on the third quarter results as:

"We are pleased with our third quarter results which exceeded our expectations on both the top and bottom lines. The primary driver of the overachievement to forecast was the outstanding and accelerating performance in our core Steven Madden Women's wholesale footwear division. Strong sell-through we saw in this brand in spring has continued into fall and our key retail customers are responding by shifting more open-to-buy dollars to the Steven Madden brand."

Source: Stockrow.com

If you look back the history of company's sales and earnings growth, it has performed with impressive growth, on average, in both revenues and earnings in the last decade. The company's net sales have been increasing at the compound annual growth rate (CAGR) of 16% and earnings per share (EPS) increased at the CAGR of 19% since the hype of financial crisis. This should be called an impressive performance because the companies in the retail industry face a challenging business environment due to ever changing consumer spending habits.

However, investors should be more concerned about the forward-looking prospects of the subject company's business rather than the historical performance because the investment profession is a forward-looking phenomenon, although we cannot ignore the history at all. Look at the forecast earnings growth graph below. Although the expected earnings growth is not as much convincing as it was in the previous years, still it is impressive for a company like Steven Madden that is a stable business concern. The current ongoing fiscal year's earnings growth is expected to be around 10% and the next five years earnings growth rate is expected to be 12%. The growth prospects alone are strong enough to make the company's stock part of a long stock portfolio.

Source: Company presentation

Source: Nasdaq.com

Steven Madden looks fundamentally like a solid company that is generating good wealth for its capital providers. The company's profitability measures are better than its peer's average measures. Its profit margin is 8.11% compared to 7.56% for Skechers (NYSE:SKX) and 3.28% for Caleres (NYSE:CAL). Its EBITDA margin of 13.70% is also higher than the competitors' average EBITDA margin. Additionally, the most important measure the investors should be concerned about is the return on invested capital (ROIC), the economic profit, and this return measure for the Steven Madden is 42.26% that is much higher than industry's average of about 25%. This results in a wider economic profit spread for investors because the company's cost of capital (WACC) is 10.8%. Moreover, the companies that produce free cash flow margin of more than 5% are best considered as cash cows. Free cash flow margin for the Steven Madden is 9.89%, which indicates that the company's ability to generate free cash flows is very robust.

Steven Madden has a robust financial position as shown by the following graph. The company has managed a debt-free balance sheet since 2010, which is a strong positive in favor of equity investors. That leverage-free financial position translates into no default risk to the company for the foreseeable future. Additionally, the company's asset base is robust and trending upward coupled with strong brand equity. I believe the company will be able to further enhance the intangible assets in the future based on its robust fundamentals and financial position.

Source: Stockrow.com

Another important factor to consider in terms of Steven Madden's financial position is its cash balance. During the third quarter of fiscal 2016, the company repurchased its shares of approximately $25.3 million worth and still maintains a healthy cash balance of $183.5 million on its balance sheet. Investors should consider a few points here. First of all, the shares repurchase itself is a strong positive indicator for the company's future prospects. Secondly, the company has enough net cash to further repurchase its shares in the future to offset the dilution effects and to enhance the earnings per share because the company has no debt on its balance sheet. Another best use of excess cash could be to reward shareholders with the dividends. With this healthy cash balance in its pocket, the company has the flexibility to further expand its business locally or internationally. Either case could be a strong plus for shareholders.

Valuation

Steven Madden looks attractive too in terms of current valuation metrics, as shown in the below table. The forward P/E multiple of the company is 16.15x as compared to the industry's forward multiple of 19.55x. Based on the company's expected EPS of$2.02, the stock has a fair value of $39.5 with an upside potential of above 11%. All other relative valuation measures, shown in the below table, indicate that the stock of the company is undervalued. The suggested fair value based on these ratios is in the range of $40-to-$50. However, being pessimistic, I set the target price for the stock to $42, which would result in the above 18% price appreciation. Moreover, the P/E ratio's trend is downward and it is expected to come further down in next few years based on the decent double-digit expected earnings growth rate in next five years.

Technically, the stock's relative strength index (RSI), as shown in the stock performance graph above, is right in the buying block, which is a strong bullish indicator. Additionally, the short interest for the company's stock is at the lower side, only 4.41% of the float, which indicates that the investment community is bullish on this stock. Moreover, the short interest has declined about 13% from the prior month's short interest. Hence, the technicals strongly support the fundamental valuations as well as the investment thesis.

Source: Morningstar

Source: Nasdaq.com

All of the above analysis of the business fundamentals and the financial position put me at a bullish stance for Steven Madden. The valuation of the stock suggests that it is undervalued and offers an upside potential of over 18% to achieve the target price of $42 in the next 6-to-12 month investment holding period.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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Tagged: , , , Textile - Apparel Footwear & Accessories
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