Deckers Outdoor Would be a Buffett Buy if...
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Deckers Outdoor (NASDAQ: DECK) would be a Buffett Buy if...
I could find it's competitive advantage. Deckers, maker of Uggs Winter Apparel and Teva Sandals, is down 36% in the last year as earnings have cooled down from their high expectations. Apparently things haven't cooled down quite enough as a major reason management cites for weaker earnings was the lackluster winter we just had. Rising sheepskin prices also cut margins and suddenly the bears were calling!
When I first looked at Deckers I was surprised by its tumble. Its 5-year average return on equity is 22.6%(!) and over the last 12 years that ROE has been 15%, so Deckers' business model has always been strong, but it looked like it was growing even stronger in recent years. The strength of these cool winter shoes seemed even stronger when I put together a graph of Deckers' revenue in the past years:
It's quite clear that this is a strong company and with CEO Angel Martinez owning more than $16 million worth of stock and a recent bullish Barrons article citing a 35% reduction in sheepskin prices, it would seem that Deckers would be the perfect Buffett buy. Cheap Business (11x EPS), Understandable Business (sells shoes), Great Management (Angel Martinez has been CEO for 7 years, look at the revenue chart for yourself, his tenure has been defined by greatness), Competitive Advantage.... This is what always stops me.
The key to the bear thesis is that this company has no edge, and to some level they're right. The growth of the company over the past few years has come completely from the Uggs brand, a brand that might just be a fad. My younger sister bought a pair of Uggs a few years ago and when I asked her why she didn't want new ones, she told me "they just weren't cool anymore." It may have been a warm winter, but I really didn't see many Uggs at all out and around.
So when I consider why Deckers Outdoor Corporation is not a Buffett style buy, the answer is that its product is no different than any other company's product unless the market sees it that way, and I realize I'd rather not get stuck in a Crocs (NASDAQ: CROX) type of situation. Crocs is another shoe fad, and I think the 60% decline in the stock over the last 5 years speaks volumes about the terror a brand thrown out of fashion can have on a company.
Another Similar Situation
In the past three months, Tempur-Pedic International (NYSE: TPX) is down 72%. Similar to Deckers, over the last 8 years Tempur-Pedic has had returns on equity above 30% annually and gross margins above 50% suggest a possible competitive advantage. However, when looking at the stock itself, I would urge investors to be careful. Though I sleep on a Tempur-Pedic mattress (they truly are the best), I don't see how Tempur-Pedic can differentiate itself from its competitors on a product basis, and I expect to see margins declining in the future. Just because Tempur-Pedic is cheap now, doesn't mean it will be cheap next year when earnings decline (remember that based on expected earnings, Tempurpedic's P/E is still 10, not the 6.6 that Google Finance displays). The reason for this decline is that competition is entering the conversation, and I think the decline was actually merited. The main thing that Tempur-Pedic International has going for it right now is intangible assets. While competition is entering the conversation, Tempur-Pedic is about to find out if it's just another commodity company like Crocs, or if it has a competitive advantage in its reputation and the brand quality of its products. Remember that The Coca-Cola Company has a clear competitive advantage in its brand name, even though its product isn't materially different from other sodas (OK, that's arguable, but you see my point).
To close, be wary of sudden extreme values. Often declines will have good reasoning behind them, and you can't be contrarian for everything. When a stock you want declines, make sure to look at why it declined and try to find if it was merited. Generally you can weed out the value traps pretty well this way.
shamapant has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and Tempur-Pedic International. Motley Fool newsletter services recommend The Coca-Cola Company. 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.
