Uggs: Pet Rocks or Barbie Dolls?

When considering potential investments, Warren Buffett, chairman of Berkshire Hathaway (NYSE: BRKa  ) (NYSE: BRKb  ) , looks for a sustainable, long-term competitive advantage in a company. For consumer goods companies, the key, as he puts it, is to differentiate those that sell "pet rocks or hula hoops" from those that sell "Monopoly or Barbie." This has been a key part of his justification for long-time holdings such as Coca-Cola (NYSE: KO  ) and Gillette, now owned by Procter & Gamble.

I've long argued that DeckersOutdoor (Nasdaq: DECK  ) looks and feels to me a lot more like a company selling pet rocks than one selling Barbies. In particular, the popularity of its Ugg boots has always seemed to be ephemeral. I recently made the case that the bulk of the company's value was in its Teva brand, which I believe has real, sustainable value and is clearly more than a passing fad.

Though perhaps ephemeral, it does appear that Uggs' popularity has lasted longer than many (myself included) believed. Ugg boots were recently featured on Oprah Winfrey's TV show as "one of her favorite things of 2005." Deckers' stock was then highlighted on the CNBC show Mad Money. It has almost doubled in the last 30 days: Oprah Winfrey and Jim Cramer are an undeniably powerful combination.

Given this recent rebound in the stock, the question with Ugg is whether this product is in fact more of a Barbie than a pet rock, or whether the recent exposure from Oprah and Jim is simply the final, euphoric indication that the fad has peaked. I'm standing my ground and continue to believe that Ugg will be a short-lived phenomenon.

If I'm right, I believe the intrinsic value of this company is about $200 million, or $16 per share, about half of its current value.

However, if I'm wrong, the stock should trade with a valuation that is on par with comparables. Brown Shoe (NYSE: BWS  ) trades at an enterprise value-to-EBITDA ratio of 8.7, Nike (NYSE: NKE  ) at 9.1, and Reebok (NYSE: RBK  ) at 10.2. With its share price just more than $30, Deckers still trades at 6.9 times EBITDA (earnings before interest, taxes, depreciation, and amortization). A valuation in line with its competitors would imply a stock price of around $40.

Despite the fact that I no longer have a position in the stock, this is a story that I'll watch closely as it unfolds. As my wife will readily confirm, I'm by no means an expert on fashion. But I still think that by this time next year, the popularity of Ugg boots will have waned, Oprah and Jim will move on to the next hottest thing, and the stock will be trading closer to $16 than to $40 per share. Stay tuned.

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Fool contributor Salim Haji lives in Denver and owns shares of Berkshire Hathaway, but does not own shares in any of the other companies mentioned.


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