Is This Boot Maker Valuable or a Value Trap?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Several years ago, UGG sheepskin boots, Deckers Outdoors' (NASDAQ: DECK) main product, became incredibly fashionable and popular among teenagers. The popularity of UGG was reflected in the company’s share price, which had risen significantly from $13.30 in March 2009 to $117.66 in October 2011. At that time, it had really been a darling of the stock market. However, since the end of 2011, Deckers Outdoor has kept falling to only $39.90 per share. At the current trading price, many investors wonder whether it is really cheap or a value trap. 

Business Slowdown

Deckers Outdoor has been quite famous with its fashionable UGG boots, which contributed the majority of the company’s revenue. In 2011, UGG’s revenue was more than $1.2 billion, accounting for nearly 87.1% of the total revenue. The two other brands, Teva and Sanuk, contributed only 9.3% and 1.9% of the total revenue, respectively. Recently, UGG’s sales have experienced a slowdown due to two main factors: the rising raw material cost (sheepskin) and the unusually warm weather. That was why Deckers Outdoor has reduced its full year 2012 guidance. The company expected sales to grow at 5%, lower than the previous guidance of 14%. In addition, EPS would decrease around 33%, compared to the previous estimate of only 9% - 10%.

Value or Value Trap?

At the current price of $39.90 per share, Deckers Outdoor is worth $1.41 billion on the market. The market is valuing the company at nearly 6.3x EV/EBITDA. It is definitely the cheapest among its peers, including Nike (NYSE: NKE) and Wolverine World Wide (NYSE: WWW). With the total market cap of $48.1 billion, the market is valuing Nike at 13.21x EV/EBITDA.  Wolverine has $2.11 billion in market cap, and is valued at 12.3x EV/EBITDA. Even with a much cheaper valuation, Deckers Outdoor enjoyed the highest operating margin.

Over the last twelve months, the company generated a 16% operating margin, while the operating margin of Nike and Wolverin were 12% and 10%, respectively. As of September 2012, it had $681.8 million in total stockholders’ equity, $61.6 million in cash, and $275 million in short-term debt. Trailing twelve months, the operating cash flow was $69 million, the EPS was $4.06 and the return on invested capital was as high as 18.03%. It looks like a value play, however, many people thought UGG was only a fad. Indeed, if UGG is really a fad and Deckers Outdoor keeps relying on UGG brand too much, the company's stock price will keep declining.

The Possibility of Being Acquired

However, investors forgot one factor that might drive the Deckers Outdoor’s share price much higher: the buyout factor. Actually Jim Cramer has mentioned this possibility, saying that VF Corporation (NYSE: VFC) might acquire Deckers Outdoor. VF has experience in buying brands and turning them around by cutting expenses and expanding distribution channels in many countries. In 2011, VF bought Timberland and turned it into an “international powerhouse” in less than 18 months. Before the acquisition, Timberland had struggled with rising production costs, which made its profits decrease by 30%. With a $2 billion price tag, VF valued Timberland at 1.4x P/S and 9x EV/EBITDA. Thus, if we placed the same Timberland’s buyout valuation on Deckers Outdoor, Deckers Outdoor might be acquired at around $55 - $57 per share. Jim Cramer estimated the buyout price to be a bit higher, at $60 per share.

Foolish Bottom Line

With a cheap valuation and highest operating performance, I personally think that the possibility of Deckers being acquired by either VF or other companies is quite high. If that happens, investors might gain as much as 50% of the current trading price. 

hoangquocanh has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus