Is It Time to Deck Out your Portfolio?

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

In the past 9 months, Deckers Outdoor Corp (NASDAQ: DECK) has been left outside to dry. After hitting a new all-time high of $118.90, Deckers began its descent. Known most famously for its UGG Australia brand, Deckers has been more than cut in half, dropping to a merger $42.07, levels not seen since the middle of 2010. That represents a drop of $76.83, more than a share is even worth now, or 64.62%, from the 52 week high. This drastic price cut on Deckers’ stock has been caused by a number of things.

Most importantly, Deckers' biggest source of revenue is the UGG Australia brand, boots most commonly worn in colder weather. Recently, abnormal weather patterns have led to historically high temperatures, which in turn have and will continue to create less of a need for boots such as UGGs. Additionally, several analysts believe Deckers' decision to raise the price on the already expensive UGG boots may be a fatal mistake. Analysts do not believe the consumer is going to pay $200 for a pair of boots that they cannot use for the greater part of the year because of warmer weather. Finally, the street is becoming more and more aware that the UGG craze is beginning to wane. Before there were mob scenes in front of every retailer that sold UGGs, now it is milder because of increased competition such as EMU boots, bear paw boots, and other less expensive alternatives. Despite these concerns, is it time to deck out your portfolio with Deckers Outdoor Corp?

<img src="/media/images/user_13174/deck_large.png" />

Wobbly Growth

In 2010, Deckers reported earnings per share of $4.03. In 2011, Deckers stated that earnings per share had jumped $1.04 to $5.07, representing 25.81% year over year earnings per share growth. In 2012, the average consensus believes that earnings per share will decline to $4.50, displaying a -11.24% decline. In 2013, the Street expects Deckers to return to its expanding ways, with its earnings per share rising to $5.44, displaying 20.89% year over year earnings per share growth. Again in 2014, the average consensus believes Deckers will grow this time to $6.10, representing 12.13% year over year growth. The company anticipates to pull this growth from its UGG brand, which grew 37.86% just from 2010 to 2011, and its TEVA brand, which grew 23.42% from 2010 to 2011.These two brands combined represented 75.07% of Deckers' revenue in 2011. All in all, Deckers' earnings per share growth is rather inconsistent, rising and falling with different market conditions, but is growing and expanding on the long-term spectrum. The chart below displays Deckers' sales, operating profit, net income, net margin, operating margin, and earnings per share over the coming years.  

<img src=",2,605,375,Deckers+Outdoor+Corp/A05AE/2/Income+Statement+Evolution.png" />

<img src=",2,360,280,Deckers+Outdoor+Corp/A05AE/2/EPS+Dividend.png" />

Uggs May Not Be in the Discount Aisle, But Decker’s Stock Is

Deckers' stock currently is trading at $42.07, prices not been seen since the middle of 2010. The stock has decreased 64.62% from its 52-week high, and is currently 7 cents away from its 52-week low. The S&P 500 price to earnings ratio is 15.35. Deckers' price to earnings ratio is 8.78. This metric screams that Deckers' stock is vastly underpriced. Usually a price to earnings ratio in the single digits signals a company that has little to no growth. Deckers is expected to expand its earnings per share 51.36% from 2010 to 2014. This growth rate is well superior to the average S&P 500 growth rate, yet Deckers' stock is not credited for it.

The price to earnings to growth ratio takes into account Deckers' decent growth, and shows just how vastly underpriced the stock has become. This ratio signifies a fairly valued company when the ratio sits at 1. Deckers' PEG ratio is 0.49. This is yet another ratio that points to the fact that Deckers may be wildly underpriced.

A final indicator that displays Deckers' bargain price is the price to book ratio. The S&P 500 price to book ratio is approximately 2.22 at the moment. Deckers' price to book ratio is 2.00. This again points to the fact that Deckers is underpriced, and unlike Uggs, is in the discount aisle. The chart below presents Deckers' price to earnings ratio if the stock price was to remain at $42.07.

<img src=",2,360,280,Deckers+Outdoor+Corp/A05AE/2/Price+Earning+Ratio.png" />

How Does Deckers Stack up Against the Competition?

When shopping for a pair of shoes, the consumer does not just buy a pair of shoes because they see them first. Instead, the consumer compares them to similar shoes, taking into account price, style, and comfort. The same can be done with stocks to help determine the king of the industry. Compared to its competitors such as Crocs Inc. (NASDAQ: CROX), Nike Inc. (NYSE: NKE), and Skechers USA Inc. (NYSE: SKX), Deckers stacks up relatively in line.

Earnings per Share Comparison

Earnings per share analysis will allow the investor to see the underlying businesses’ growth fundamentals and growth consistency. 

<table> <tbody> <tr> <td> </td> <td> <p>2010</p> </td> <td> <p>2011</p> </td> <td> <p>2012</p> </td> <td> <p>2013</p> </td> <td> <p>2014</p> </td> </tr> <tr> <td> <p>DECK</p> </td> <td> <p>$4.03</p> </td> <td> <p>$5.07</p> </td> <td> <p>$4.50</p> </td> <td> <p>$5.44</p> </td> <td> <p>$6.10</p> </td> </tr> <tr> <td> <p>CROX</p> </td> <td> <p>$0.76</p> </td> <td> <p>$1.24</p> </td> <td> <p>$1.47</p> </td> <td> <p>$1.73</p> </td> <td> <p>$1.90</p> </td> </tr> <tr> <td> <p>NKE</p> </td> <td> <p>$3.86</p> </td> <td> <p>$4.39</p> </td> <td> <p>$4.73</p> </td> <td> <p>$5.29</p> </td> <td> <p>$6.01</p> </td> </tr> <tr> <td> <p>SKX</p> </td> <td> <p>$2.78</p> </td> <td> <p>-$1.39</p> </td> <td> <p>$0.11</p> </td> <td> <p>$0.79</p> </td> <td> <p>$1.28</p> </td> </tr> </tbody> </table>

<img src="/media/images/user_13174/1_large.png" />

Based on $1 Starting Price

Deckers has relatively high growth compared to its competitors, turning $1.00 in earnings per share in 2010 into $1.51 in 2014, but has nothing on the king of the industry in terms of growth, Crocs. Crocs converts $1.00 in earnings per share in 2010 into nearly $2.50 in earnings per share in 2014. Going step for step with Deckers is Nike, which has the most sustainable and consistent growth in the sector. On the bottom of food chain is Skechers, which turns $1.00 of earnings per share in 2010 into $0.47 of earnings per share in 2014. Deckers is not the king of the industry in terms of growth, but fits somewhere in the middle.

Book Value Growth Comparison

Book value growth comparison will enable the investor to determine how much book value is priced into each share, and determine how much book value, or underlying value, will be produced in the future.

<table> <tbody> <tr> <td> </td> <td> <p>2010</p> </td> <td> <p>2011</p> </td> <td> <p>2012</p> </td> <td> <p>2013</p> </td> <td> <p>2014</p> </td> </tr> <tr> <td> <p>DECK</p> </td> <td> <p>$16.90</p> </td> <td> <p>$21.60</p> </td> <td> <p>$24.40</p> </td> <td> <p>$31.70</p> </td> <td> <p>$33.60</p> </td> </tr> <tr> <td> <p>CROX</p> </td> <td> <p>$4.24</p> </td> <td> <p>$5.48</p> </td> <td> <p>$6.89</p> </td> <td> <p>$8.64</p> </td> <td> <p>$8.64</p> </td> </tr> <tr> <td> <p>NKE</p> </td> <td> <p>$20.00</p> </td> <td> <p>$21.00</p> </td> <td> <p>$22.00</p> </td> <td> <p>$24.20</p> </td> <td> <p>$26.60</p> </td> </tr> <tr> <td> <p>SKX</p> </td> <td> <p>$18.80</p> </td> <td> <p>$17.30</p> </td> <td> <p>$18.00</p> </td> <td> <p>$18.50</p> </td> <td> <p>$19.60</p> </td> </tr> </tbody> </table>

<img src="/media/images/user_13174/2_1_large.png" />

Based on $1 Starting Point

Deckers is growing its book value at a rate only bested by Crocs, turning $1.00 of book value in 2010 into $1.99 of book value in 2014. Once again Crocs outdoes Deckers turning $1.00 of book value in 2010 into $2.03 of book value in 2014. Nike performs decently, while Skechers again is on the low end of the industry. Deckers' ability to grow book value at a substantial pace will enable investors to pay less for future earnings. Deckers' growing book value may become a catalyst for the stock to make an upward movement.

The Foolish Bottom Line

Deckers has been falling, and falling, and falling, and may not be done falling, but may have fallen farther than it deserved to. It possesses a few positives, such as decent growth and a basement bargain price, but still faces global slowdown implications as its brands are considered luxury items. Deckers is a falling knife, and if one tries to catch a falling knife, they might get cut and bleed, but long-term investors may find the current prices of Deckers Outdoor Corp to be a bargain.       

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