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DECK: Mr. Market Was Active Today

September 09, 2010 | About:
becomingbuffett

becomingbuffett

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This morning Susquehanna Financial downgraded Skechers (SKX) to "neutral" from "positive". Skechers ended the day down 12.6%. Crocs (CROX) dropped almost 16% on massive volume. Even Deckers Outdoor (DECK) got taken down, falling 5.27%.

Was this sell-off warranted? Not for Deckers, in my opinion. If you recall, DECK reported record numbers for Q2, increasing EPS 155% YOY! Let's take a closer look at this juggernaut.

Overview:

The company is best known, of course, for its UGG sheepskin boots that are very popular with the ladies. They are also the force behind Teva sandals and Simple shoes.

CEO Angel Martinez is a seasoned veteran. Before joining Deckers in 2005, he was the CEO of Keen, and, before that, Rockport.

Financials:

DECK has a pristine balance sheet. At the end of Q2 they had $334 million in cash (about $8 per share) and zero debt. They're also a cash machine. Value Line names them on their list of "Biggest Free Cash Flow Generators."

Look at the annual growth Deckers has achieved during Martinez's tenure (5 years):

Revenues: 30.0%

Cash Flow: 42.0%

Earnings: 46.0%

Book Value: 29.0%

I see no signs of a slowdown, either. DECK is opening up eight new retail stores here in the US. But, the big surprise could come from international growth. In 2009 sales from outside the US accounted for 20% of revenues. The company has a stated goal of increasing this to 30% over the next few years.

Deckers is much more profitable than its peers with a net profit margin of 14.8% (compared to 3.54% for SKX, -6.52% for CROX). Most importantly, DECK seems to know what to do with all this cash they're generating: ROE has steadily increased the last four years from 17.9% in 2005 to a 23.9% last year.

Price:

With today's pullback, Deckers is trading at a PE (TTM) of 14, and, according to Yahoo Finance, a PEG of just 0.56!

Bottom Line:

I think DECK is the perfect example of a "wonderful company at a fair price".

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(Disclosure: I probably don't even need to say it--I'm long Deckers.)

Rating: 2.9/5 (10 votes)

Comments

becomingbuffett
Becomingbuffett premium member - 4 years ago
When I posted this on September 9th, DECK's share price dropped all the way down to $45.01. Today they announced results for Q3, and, once again, they greatly exceeded everyone's expectations. As I write this, the price is now up to $57.12 per share--a gain of almost 27% in 49 days! I'm glad I "loaded up" the day I wrote the original article.

I'll say it again . . . Mr. Martinez is an exceptional leader, and DECK is one to watch.
becomingbuffett
Becomingbuffett premium member - 3 years ago
DECK closed today at $79.94. It's up 77% since September 9th! I'm closing my position. I think the company is phenomenal (look at the growth numbers above; zero debt; great returns; a unique product), but the stock has turned into a momentum play--up almost 20% in the last 5 days. I certainly wouldn't buy it at the current price.

In my opinion this is a perfect example of Mr. Market at work: an analyst downgrades a competitor; the market overreacts, selling off several companies in the space; DECK outperforms--beating estimates, as usual; analysts upgrade DECK--hype starts; market overreacts again, driving DECK's price above what it's worth.

Thank you very much, Mr. Market!

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