Will Wolverine Stay on the Top Side?

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Wolverine Worldwide (NYSE: WWW  ) is seeing the fruits of its M&A efforts pay off, with the recent earnings report showing a massive gain in income and, hopefully, more growth to come. Brands picked up last year such as Sperry Top-Sider, Saucony, and Keds are driving the company higher -- giving management the go-ahead to raise full-year EPS guidance. With a forward P/E of nearly 17 times, though, this shoe-slinger isn't the best bargain in the bin. At the company's current valuation, can the newly acquired brands keep things moving fast and consistently enough in coming years, or is the stock a little too hot?

Earnings recap
Wolverine saw its bottom line rise more than 60% this past quarter to an adjusted $1.16 per share -- well ahead of Wall Street's consensus estimates of $1.05 per share. Driven by the company's brand acquisitions, sales more than doubled from their year-ago numbers to $716.7 million. The Street had been expecting $711 million.

On a pro forma basis, sales still bumped up 9%. Gross margins expanded slightly, while operating margin fell 110 basis points.

Looking ahead, the company expects EPS in the range of $2.73 to $2.83 per share. Prior to the earnings announcement, management had guided for $2.60 to $2.75. For the coming fiscal fourth quarter, expect revenues up a maximum of 6%.

Clearly, things have worked out well and the Collective Brands acquisition was a winning deal for Wolverine, but can it carry the company as high as valuation?

If the shoe fits
Sperry is the value driver here. The brand has seen 16 straight quarters of double-digit growth. The once-'80s fashion footwear is now the 2010s must-have shoe for people on the East Coast of the United States (and elsewhere, presumably). As long as the brand doesn't trip out of favor, the company should continue to reap the attractive benefits. Wolverine has put the shoe into dozens of new markets, including China.

Management is being responsible, too, putting the additional cash flows to work by paying down the relatively large debt load the company took on during its acquisition. Since October 2012, the company has pushed its debt down nearly $180 million. Now that the company has its prized brands under the Wolverine umbrella, this is a smart use of capital, and could be coupled with a share buyback down the road to enhance shareholder returns.

In the meantime, investors interested in Wolverine Worldwide should understand that their investment rides on the continued success of the new brands, with an emphasis on international sales. At its current valuation, the stock doesn't have too much wiggle room for any unforeseen bad news. That said, the stock could easily continue its rise (up more than 30% in 12 months), similar to Deckers Outdoor, which has risen nearly 80% in the past year on the back of brand revival and expansion. Wolverine can unlock further value in the future by smart capital allocation in the wake of its spot-on acquisition.

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