The stock of Deckers Outdoor (NYSE:DECK, 30-year Financials) appears to be 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 $374.79 per share and the market cap of $10.4 billion, Deckers Outdoor stock is estimated to be significantly overvalued. GF Value for Deckers Outdoor is shown in the chart below.
Because Deckers Outdoor is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 14.6% over the past three years and is estimated to grow 13.21% annually over the next three to five years.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company’s financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company’s financial strength. Deckers Outdoor has a cash-to-debt ratio of 4.88, which ranks better than 82% of the companies in the industry of Manufacturing - Apparel & Accessories. Based on this, GuruFocus ranks Deckers Outdoor’s financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Deckers Outdoor over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Deckers Outdoor has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $2.5 billion and earnings of $13.47 a share. Its operating margin of 19.81% better than 93% of the companies in the industry of Manufacturing - Apparel & Accessories. Overall, GuruFocus ranks Deckers Outdoor’s profitability as fair. This is the revenue and net income of Deckers Outdoor over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Deckers Outdoor is 14.6%, which ranks better than 91% of the companies in the industry of Manufacturing - Apparel & Accessories. The 3-year average EBITDA growth rate is 31.1%, which ranks better than 86% of the companies in the industry of Manufacturing - Apparel & Accessories.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Deckers Outdoor’s ROIC is 47.50 while its WACC came in at 5.77. The historical ROIC vs WACC comparison of Deckers Outdoor is shown below:
In conclusion, The stock of Deckers Outdoor (NYSE:DECK, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 86% of the companies in the industry of Manufacturing - Apparel & Accessories. To learn more about Deckers Outdoor stock, you can check out its 30-year Financials here.
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