The stock of Skechers USA (NYSE:SKX, 30-year Financials) shows every sign of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $48.5 per share and the market cap of $7.5 billion, Skechers USA stock appears to be significantly overvalued. GF Value for Skechers USA is shown in the chart below.
Because Skechers USA is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 3.7% over the past three years and is estimated to grow 10.25% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Skechers USA has a cash-to-debt ratio of 0.68, which is in the middle range of the companies in the industry of Manufacturing - Apparel & Accessories. The overall financial strength of Skechers USA is 6 out of 10, which indicates that the financial strength of Skechers USA is fair. This is the debt and cash of Skechers USA over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Skechers USA has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $4.8 billion and earnings of $0.94 a share. Its operating margin is 5.15%, which ranks in the middle range of the companies in the industry of Manufacturing - Apparel & Accessories. Overall, GuruFocus ranks the profitability of Skechers USA at 7 out of 10, which indicates fair profitability. This is the revenue and net income of Skechers USA over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Skechers USA is 3.7%, which ranks better than 70% of the companies in the industry of Manufacturing - Apparel & Accessories. The 3-year average EBITDA growth is -13.3%, which ranks worse than 70% of the companies in the industry of Manufacturing - Apparel & Accessories.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Skechers USA's return on invested capital is 6.40, and its cost of capital is 8.64. The historical ROIC vs WACC comparison of Skechers USA is shown below:
In short, the stock of Skechers USA (NYSE:SKX, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 70% of the companies in the industry of Manufacturing - Apparel & Accessories. To learn more about Skechers USA stock, you can check out its 30-year Financials here.
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