Why I Sold Deckers
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
At certain points as an investor, you have to realize that your original thesis was wrong. This is the conclusion I reached when I looked at Deckers Outdoor (NASDAQ: DECK). Originally, when I bought the stock, I liked the growth of the UGG brand. I also was impressed by the additional brands the company owned, such as Teva, and the new Sanuk acquisition. However, over time I realized the error of my ways and sold my shares. Looking at the company's most recent earnings report, I actually should have sold my shares earlier. At the time, I didn't really understand the reasons that Decker stock was selling off as much as it was. Let me show you from this report exactly what I mean.
Sometimes, other authors give investors a chance to understand the problems behind the company. However, if you are too set in your thought process, you might make the same mistake that I did. In a recent article by Alex Planes of The Motley Fool, several such reasons to sell Decker's stock were given. Issues such as relying almost entirely on the UGG brand, rising material costs, and slowing free cash flow were pointed out. My problem, was I wanted to believe that rising material costs would eventually abate, and that would solve Deckers' problems. Unfortunately for investors, this is not the case.
If you look at the company's recent earnings report, initially you notice that sales were up over 20%. Normally this would be a positive sign, and when you add in that free cash flow was positive $15.88 million versus a $-1.477 million last year, this should give investors hope. The problem is all the numbers behind the headlines tell a different truth. For instance, when you realize that cost of sales increased almost 30%, and selling general and administrative expenses increased over 36% you can see that the company is going to have a problem with earnings. If you dig further into the earnings report, the numbers get a little bit worse. The most troubling statistic that I saw was UGG sales were up only 0.93% and considering this brand makes up 53% of net income, this tiny increase in sales does not bode well for the future. In addition, the company's second-largest brand Teva, saw sales decrease by 2.18%. Since Teva makes up another 15% of net income, this is yet another issue for the company to overcome.
In fact, without the new acquisition of Sanuk which contributed 13.1% to total sales, the company's overall sales would have increased just 4.48% versus the over 20% reported. In my initial estimates for buying Deckers in the first place, I assumed that analyst growth expectations should be fairly accurate. However looking at the expected revenue growth for 2012, I have to wonder how those numbers are going to occur and how that fits in with future earnings growth. With the stock selling at just about 10 times forward earnings, investors might believe that Deckers is a bargain priced stock. The reason I still sold it is I'm not convinced that forward earnings growth will materialize. With analysts predicting over 18% EPS growth in the next five years, Deckers is going to have to do a lot of work to make this occur. Unless the company can diversify away from the tremendous impact that the UGG brand has on results, Deckers will be tied to the results of its flagship brand. Now that you know why I sold Deckers, let me give you three alternatives that seem like better investment opportunities at this time.
Admittedly, none of these three companies is a direct competitor to Deckers, that's on purpose. Since Deckers competes in the highly competitive fashion industry, I wanted to avoid a situation where the sales, or lack thereof, of a major brand would cause the stock to sink or swim. With that in mind, three companies I would consider are Waste Management (NYSE: WM), Aflac (NYSE: AFL), and Chevron (NYSE: CVX). My primary reason for selecting these three companies, is in all three cases you have a situation where the company is well-established, their product is constantly needed, and all three have a history of raising their dividends.
Waste management is a leader in its field. At current prices, the stock pays a yield of over 4.4%. With analysts expecting earnings growth of about 10%, and the stock selling for about 15 times forward earnings, it seems like a good value. While it's debatable whether the UGG brand will come back into fashion, what will always be in fashion is cleaning up trash and recycling. Where Aflac is concerned, the company in my estimation is, one of the most undervalued in the market today. With the stock selling at just 6.5 times future earnings estimates, and expected to grow at over 11% going forward, investors are not taking much risk for a well-known growth story. The fact that the stock is down enough to where the yield is roughly 3% is yet another plus. Chevron really needs no introduction, but with a 3.4% yield and settling for just 8.6 times forward earnings, it's a good play on future increases in oil prices.
You might notice a theme among the three companies I selected, and that's purposeful as well. All three companies pay a decent dividend, they have a history of raising their dividends, and all three companies are well-established. That's their differentiating factor between Deckers. While Deckers has to rely on the fashion industry, and one particular brand, none of these three companies is beholden to one item in the same way. The fact that Deckers chooses not to pay a dividend is just another factor that caused me to sell the shares. I've read in other articles, questions about if there's a dividend bubble, but there is nothing about the three previously mentioned companies that says that their dividend yield is unusually low (indicating unusual buying), or in any trouble. While none of these companies has the same growth potential as Deckers if things turn out well, I'm quite confident that none of these three companies would see a 40%+ decline based on a small earnings miss. The bottom line is, sometimes you have to pick stocks that let you sleep at night.
MHenage owns shares of Aflac, Chevron, and Waste Management. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services recommend Aflac, Chevron, and Waste Management. 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.If you have questions about this post or the Fool’s blog network, click here for information.
