Footwear and apparel maker Rocky Brands (NASDAQ:RCKY) rallied yesterday on its first-quarter earnings report. Did net profit go up? No, that went down 14% to $0.8 million. What about diluted earnings per share? That figure declined roughly 13% to $0.14. Sales did move up 7% to $61.7 million, but was that enough to explain the more than 18% run-up in share price?

Not really. Credit the expectations game for this one. Looks like analysts were only seeking about $0.04 from this competitor to well-known footwear manufacturers such as Timberland (NYSE:TBL) and Wolverine World Wide (NYSE:WWW).

Hey, coming in way ahead of expectations can certainly be noteworthy. Furthermore, if you look at Rocky Brands' stock, it appears somewhat on the cheap side. At $13.53, the price as of this writing, it sports a forward PEG ratio significantly less than 1.0. According to the most recent 10-K, Rocky Brands earned $0.86 per diluted share for 2006. If the company does grow earnings around 35%, as is stated by the guidance, and comes in around $1.16 per share, then the forward P/E ratio would be roughly 11.6. This does seem cheap when you consider that a 35% growth rate and the 22% growth projected by a couple analysts for 2008 is within reason.

I have some reservations about this situation, however. A look at the 10-K shows that operational cash flow has been volatile and fell severely in 2006 and that a lot of debt had been taken on to acquire EJ Footwear Group in 2005 -- the acquisition cost $93 million plus about 484,000 shares of common stock. Interest expense has been on the rise, and long-term debt relative to cash and equivalents is pretty wild -- the former stands at $82.6 million while the latter is roughly $1.8 million. Lastly, net income dropped from $2.33 per diluted share in 2005 to the aforementioned $0.86 per diluted share in 2006.  

So, while the stock is mathematically cheap, I personally am a bit cowed by the balance sheet and financial trends, as well as the rally in the stock. Speaking for myself, I would rather wait for a few more quarters to see what the data brings and to further evaluate the effect of the EJ Footwear purchase on earnings growth.    

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Fool contributor Steven Mallas owns none of the companies mentioned. As of this writing, he was ranked 6,070 out of 28,486 investors in the Motley Fool CAPS system. Don't know what CAPS is? Check it out. The Fool has a disclosure policy.