A Sneaky Value Play

By Josh Kohn-Lindquist - September 19, 2012 | Tickers: CROX, DECK, SKX, WWW | 0 Comments

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Investors dream of finding a stock that can grow its topline at a 20-30% clip yearly, while managing the same success on the bottom line, but are usually scared away when they see its Price to Earnings at 40,50, or even higher (lululemon and Ulta Salon, we're looking at you).  However, with Deckers Outdoor (NASDAQ: DECK) this is certainly not the case.  Despite growing its revenues 30% yearly over the last decade and seeing its EPS explode from -.25 to $5.07 in the same time frame, Deckers has been beaten down over 50% and cast aside by the investing community in 2012.  

The Drop from a $108 Beast to a $48 Darling

Have I stressed the fact that Deckers took one heck of a drop this year?  Whether it was the mild winter in the first part of 2012 or the growing inventory that is making everyone nervous, nobody appears to be interested in this beautifully valued company.  Don't get me wrong, seeing a company's inventory inflate from $100 million to $346 million in two years is nothing I am usually excited to see when it comes to investing.  Similarly, reading an article by Sean Williams about Tom Brady's image being plastered all over a massive brick wall in New York City makes me wonder just what else management has up its sleeve.  Even the most modest of NFL fans can see the flaws in this marketing concept.  However, setting these shortcomings aside for a moment, we will take a look at what is going well for Deckers.

Lets Catch That Falling Knife!

Figuratively, let's.  We will begin with a few basic valuations:

Very intriguing numbers here, but lets see how that lines up with some competition:

All in all, Deckers is the best of the competition as far as valuations go.  With the most consistent and highest growth of the group, no debt, a PEG below one and a forward PE below 10, Deckers is set to takeoff with any future growth.  It is worth noting that Wolverine is the only company of this group that pays a dividend at roughly 1%.  Perhaps the most exciting number here is Deckers' PEG of .88, especially considering they have grown revenues continuously for over 10 years and have only had one year of a lower EPS when they earned $.83 in 2006 and  $.82 in 2007.  That is an astonishingly low cost for quality growth.  Using Deckers' 5 year Price to Earnings average of 18.2 as a measuring stick, it is clear to see that they have never been valued quite this attractively in the past.  In fact, their current 10.6 PE is lower than it has been any any point in the past decade (Omitting the last two months).

Really, Why Should We Care?

Simply put, 50% selloffs due to inventory growth and a couple of guidance disappointments can sometimes offer a tremendous buying opportunity.  Yes, inventories have grown quite drastically over the last few years, but it needs to be realized that this may not only be reasonable, but necessary for future growth.  With Deckers targeting $2.4 billion in sales by 2015 as it grows its UGG brand in China and beefs up its Sanuk brand (acquired in 2011), some inventory growth will be inevitable.  However, if this sales target is achieved, it would be realized as 13% yearly growth, which should be easily achievable based on historical trends.  Throw in the aforementioned marketing campaign starring Tom Brady (with a few tweaks to the target market area) and I believe that this could be a huge addition to the Deckers marketing strategy.  After all, everything the man touches turns to gold and hopefully this is the case for Deckers' shareholders.  A long term buy and a 5+ year CAPS pick for me.

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