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Value investing is all about the wide moats, the low ratios, and the margins of safety. As time goes on, this triumvirate becomes increasingly difficult to find as the Internet provides investors with more company-specific information than we have ever had in the past -- lending some rare truth to efficient market theories. Still, though, the masses flock to the big names and over-researched stocks as they always have -- leaving fewer, but sufficient, opportunities for the fundamental investor. This company owns a few footwear brands that you can find in trendy, upscale purveyors. They are shoes often imitated by Payless brands, and they make you pay more. The stock has been all over the place in the past few years, from drastic highs to salivatingly low. Now, shares are available for a modest discount, if you're in the market for some new kicks.
The company of interest for this edition of cheap stocks is Deckers Outdoor (Nasdaq: DECK ) . You may not recognize that name, but you likely know the brands -- UGG, Teva, and Sanuk. From a ridiculous high of $118 per share earlier this year, Deckers is trading around its 52-week low. Analysts cite the company's second quarter $12 million net loss as a sign of eroding fundamentals, but they seem to have forgotten that the company still generated $10 million in free cash flow.
Now, I'll admit that UGGs aren't quite as popular as they were a few years ago, but when the weather gets cold and I stroll through a college campus (my market research for all things trendy), there are still plenty of overprivileged kids wearing $200 sheepskin boots. UGG may not be the coolest thing, but it has cemented its reputation as a comfortable, reliable, fashion-neutral foot accessory. Analysts and investors have also failed to realize that this is a seasonal business. There just isn't a huge market for warm, fuzzy shoes in the heat of summer -- unless you are in the Southern Hemisphere and it's actually winter. Most of Deckers' business is based in the U.S. and Canada, though, so this phenomenon doesn't apply. As the winter and holiday months approach, there will be a natural increase in sales. Deckers admits sales will be soft for the year, but I'm still impressed by that positive cash flow despite a weak market.
What's a Sanuk?
No, Sanuk isn't a creature from Star Wars; it's another line Deckers owns.
Sanuks are ultra-casual, hip slide-ons for men and women. You can see them at overpriced outdoors stores, overpriced beachwear shops, and other trendy (i.e., overpriced) retailers. The company recently purchased Sanuk and has had millions in expenses assimilating the company into the rest of the organization. One can expect these expenses to subside a bit going forward. Sanuks help give Deckers exposure to the hipster market, which I imagine would balk at wearing something as mainstream as UGGs.
Altogether with Teva sandals, Deckers covers the wealthy, the fashionable, the outdoorsy, and the hippie -- or, as I like to call it, the west coast of the United States.
Deckers, as mentioned, is near its 52-week low and trades at only 7.2 times forward earnings. Let's compare it with some footwear peers.
Though in a more diversified business than Deckers, Nike (NYSE: NKE ) is much more expensive at nearly 16 times earnings. Nike has the advantage of being well diversified, with market-dominating products across multiple sports. The company's EV/EBITDA ratio is 12.2 -- nearly three times that of Deckers. I like EV/EBITDA because it considers cash flow and debt obligations. In a way, it's like looking at a business from the owner's perspective.
Wolverine Worldwide (NYSE: WWW ) , the purveyor of iconic brands such as Hush Puppies, also trades steeper than Deckers. The company's price-to-free cash flow ratio is 18.4, compared with Deckers' 10.5. Wolverine was doing well until it announced it would not meet its goals because of softened demand in Europe (a tremendous surprise).
All in all, I believe Deckers has a strong portfolio of brands and is trading at a decent discount to its intrinsic value. The company holds no debt and a decent amount of cash on the balance sheet. The market may walk all over this stock coming up on year-end, but this could be a nice play in the next year or two.
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