If you’re a long-term investor in Skechers and were waiting to put more money to work, you may be thinking that yesterday was a good day. The price of the stock has decreased 7% yesterday and is down about 20% from its high. Perhaps it has something to do with insiders selling (check out the latest Form 4).
Perhaps it’s just fear taking hold.
Regardless, is now a good time to buy the stock?
Under most metrics, the answer is yes, especially if you’re in it for the long-run. However, if one looks at historical value ranges, there could be a bigger drop ahead, despite the great numbers, and we may have an opportunity to buy shares at a much better value point, which is in line with historical valuations.
Since the beginning of 2013, the P/E range has been between about 17 and 40, topping out earlier this year prior to the market turbulence. The high end of this range has not been a common, occurring once in August 2015. The low end has been seen in each of the last four quarters, despite the phenomenal growth in earnings.
Even after the big drop, today’s P/E is about 31.5, which is at a higher level than any time between the end of 2013 and June 2015. If the P/E would drop to 17, the share price would have to go all the way down to about $75 assuming they hit analyst expectations this quarter.
There are, however, a few good reasons why we most likely won’t see such a drop in price.
First, the company is executing a lot better now than it has in the past few years, which is evidenced by the substantial increase in EBIT margins:
EBITMar Mar Jun Sep Dec 2011 2.9% -11.7% 0.4% -33.7% 2012 -2.1% -1.1% 3.6% 1.7% 2013 2.2% 3.1% 8.2% 3.7% 2014 8.1% 8.6% 10.1% 5.0% 2015 10.5% 14.0%
Also, the net cash and long-term debt positions have vastly improved as well.
Cash Mar Jun Sep Dec LT Debt 2011 $351 2011 $81 2012 $392 $374 $308 $326 2012 $78 $71 $70 $129 2013 $265 $333 $333 $372 2013 $126 $123 $120 $118 2014 $329 $415 $441 $467 2014 $116 $125 $128 $35 2015 $397 $514 2015 $35 $26
The company deservers a higher multiple than the market has given it in the past, because every incremental increase in revenue is resulting in about 60% more EBIT (so far this year) than last year and it’s in a much better financial position.
Perhaps control over inventory is one of the reasons behind this improvement.
With fear a driving factor in the price today, a very good price to buy would be around $95, which reflects the P/E midpoint of the average high and average low over the past two years (21.3) applied to this quarter’s expected TTM earnings of $4.43.
See the P/E table on my prior post for the ranges:
Here are expected values at relevant P/E ratios using the expected $4.43 TTM and $6.42 TTM expected by the end of 2016:
17.2 20 21.3 26.7 28 30 40 $76 $89 $94 $118 $124 $133 $177 -40% -30% -26% -7% -2% 5% 39% 17.2 20 21.3 26.7 28 30 40 $110 $128 $137 $171 $180 $193 $257 -13% 1% 8% 35% 42% 52% 102%
Basically, Skechers is a company with increasingly good performance and prospects. It’s business execution is improving and the share price has risen dramatically over the last year or so. The market briefly gave it a premium valuation (40 X TTM) in August, which has come down quite a bit recently and could go down further if it follows historical ranges.
As the market is driven by fear now, we may see us getting closer to historical valuations. It’s impossible to say when the share price will revert back to the higher range of its valuation. But for long-term investors, the fact that margins and the balance sheet are a lot better than they have been over the past few years mitigates the likelihood that we’ll see us hit the low end of the valuation range.
Regardless, $94 share price would put us back at an average value point we had last year prior to the big run-up. With a company that is executing really well, this would be a great price to buy. But it is highly likely that we won’t get this price, because sentiment can turn really fast, especially when the fear is confronted with the reality that world economies are growing.