SKX is up big today after another great quarter. There are many people here who own SKX but there are some here who don’t and may feel that they have missed the boat. Let’s have a look.
SKX is now trading at around $85 per share. It’s TTM EPS is $3.21 giving it a P/E of about 26.5. Looking back, the earnings grew from $1.56 the year prior giving it a growth rate of 106% when looking at the full year over full year numbers. This makes the stock look very cheap even after the increase. Using Saul’s 1YRPEG we get an amazingly low 0.25. However, this is still looking back. One big question is whether this fast growth will continue. We need to try to project forward. Let’s do that.
During the conference call, SKX didn’t explicitly provide guidance but they did say that they are comfortable with the analyst projections for Q2. Let’s just use that number…call it 95 cents in diluted earnings for Q2.
What about Q3? Backlog is up and the company was still very optimistic about the back half of 2015. Q3 is their biggest quarter. International sales are now 37% of total sales and they are growing very fast overseas. Management also expects another record quarter in Q3. Let’s guess that they earn $1.50 per diluted share in Q3. Now, for Q4 I’ve arbitrarily assigned earnings of 65 cents versus 43 cents the prior Q4. I consider this to be very conservative and they could easily beat that number, I think. In fact, I think it’s likely that they could beat all the EPS numbers that I’m using, but let’s just see what things will look like if they hit what I consider these conservative numbers:
We have $1.10, $0.95, $1.50, and $0.65 for 2015. That will total $4.20 TTM P/E at 12/31/15 which will get reported in early Feb 2016. So if their P/E is to stay the same at 26.5, we should have a share price of $111.30 9.5 months from now. At $85 today, that a return of 31% in less than a year. As I mentioned, I think there’s upside in the future earnings numbers that I’m using. My opinion is that SKX is still a good buy even after today’s pop.
Chris,
Fortunately, after reading about SKX on this board, I bought. not as much as I would have liked, but I had a 6% position before today’s pop.
I completely agree with your analysis. So the question is when to buy more. I was trying to explain this to my wife. She’s Chinese and doesn’t get analysis, but she get’s it when a stock goes up more than 14% in a day. What I said about when to buy more was that if this follows the typical pattern, it will gain again tomorrow, taper off next week and then there will be a big sell-off as the profit takers come out. That will be the day to buy more. Can’t predict when precisely but I speculate about mid-week.
When to buy more? How about mid-May when the earning excitement is subsiding, bears start to crawl out, and either economy shows more signs of slow down that would excite all the doomsday predictions or the improving economy fans more rate hike fear. That would be a good time to buy.
I completely agree with your analysis. So the question is when to buy more. I was trying to explain this to my wife. She’s Chinese and doesn’t get analysis, but she get’s it when a stock goes up more than 14% in a day. What I said about when to buy more was that if this follows the typical pattern, it will gain again tomorrow, taper off next week and then there will be a big sell-off as the profit takers come out. That will be the day to buy more. Can’t predict when precisely but I speculate about mid-week.
Any thoughts?
I can’t predict where the stock price might go in the very short term, but I do believe that SKX is still undervalued.
Yeah, I know, I’m not a market timer kind of investor - in fact it seems everything I buy tends to go down in the near term after I buy (bad karma? I don’t know). But certain market behavior seems very predictable. The move in stock price after a blow-out quarterly report being one of those things. We’ll see if I’m right about this one in about a week or so.
Chris, I would take some time to consider the risks in your calculations. Everything could work out like you have stated; but it could also work out a bit differently. I think you have put on the best case at 31% expected return, but what are some alternative scenarios?
First; the EPS estimates might come in closer to what the analysis are expecting which is $4.13 not $4.20. Secondly the stock could trade at a more conservative valuation of say 20. Given that scenario you would be looking at a share price of $82 in a year; which would be a negative return. I would expect that the PE multiple to contract as the earnings and revenue growth are expected to slow.
Then there is always the case that the company slips up along the way; surely that would cause a big contraction in the PE and as well as the EPS. If EPS came in at $4.00 and the PE was compressed to an a 17 level (which is what the market average is) the stock would be at $68.
The three scenarios
High : $111
Med : $82
Low : $68
Given these scenarios I would caution buying at current levels. If the stock were to retreat into the low $70s I would consider it a lot less risky.
That’s for your post. Everyone is going to have a different opinion of what earnings will be in the future. Apparently, a lot of people agree more closely with your view (or your stated possibilities) or else the stock price would be higher today. I’d like to add a few things about my previous post that I didn’t explain before.
What P/E does a company deserve? Peter Lynch had a very general rule of thumb that if the P/E is equal to the full year of earnings growth rate over the previous year then you have a fair value. This means if the P/E is 15 then the earnings should have, for example, increase from $1.00 per share in the year prior to $1.15 in the current year. I think the whole point of Saul’s investing method is to look for companies that have P/Es far lower than that growth rate. Incidentally, Saul’s new 1YRPEG of 1.00 matches Peter Lynch’s. SKX is at 0.25 using my earnings numbers. This means that SKX is 4X cheaper!!
Have you listened to the conference call yet? If not, I would encourage you to do so. The CEO stated that he’s comfortable with the analysts’ number for next quarter (ending 6/30/2015). SKX has been beating analyst estimates and has demonstrated to be conservative in guidance and beating. I think there’s a strong chance that this will happen again in the current quarter. On the call, management was very bullish about growth for the remainder of 2015. I think my estimate of $4.20 per share are conservative and don’t consider the upside, but let’s use your number of $4.13 and see what would happen.
Using $4.13, we are comparing to $2.72 in the prior full year. That comes out to a full year growth rate of 51.8%, a P/E of 20.6 (using $85 a share price for consistency with my original post of this thread), and a 1YRPEG of 0.4. If a 1YRPEG is reasonable then a value of 0.4 is very low. In other words, to get to 1.0 the share price would need to be $127.5.
Of course, the analysis in #3 depends on strong growth in earnings beyond FY2015. If you believe that SKX growth will slow so much that it will warrant a much lower P/E then maybe you should buy more. My view is that growth will remain strong for at least several more years. My view is based on several things. First, I am weighing managements comments a lot. They are saying that their brand is strengthening and there are no signs of slowing. Second, they have been raising show prices (over 5% of the prior year); increasing prices demonstrate a strong brand. Third, they are aggressively expanding internationally. They state that they will hit 50% international sales in the next several years. They are now at 37%. If they do go to 50% their sales internationally then they will still grow a lot, especially if their US growth continues. Fourth, since they are growing and increasing prices, their margins will not suffer and the growth will only add to their operational leverage. This is how I see it. Everyone will have a unique view and will need to decide how they want to allocation their capital among the universe of investments.
When to buy … that IS the question. I’m like you … when I do buy the stock seems to go south for awhile … is it just me?
However, back to the numbers we all like to crunch and “somewhat” trust.
we should have a share price of $111.30 9.5 months from now
If the above thesis is true, then why not buy now, put the blinders on and move to the next stock? We all search for the best entry point but where? If the stock is going to reach 110+ in a year why would it matter. We may miss the opportunity to buy at this price by waiting … it could blast off. It has happened to me more than I will admit.
It depends on a lot of factors - including the rate of a risk-free return which is pretty much zero right now. I would say that trying to apply a PE based valuation tends to be tricky as you need to try to not only forecast expected future earnings; but how much the market will value those earnings. I think it is a bit naive to simply apply today’s PE multiple and think it will be relevant next year.
It is good that you have confidence is the management. Most CEOs have confidence in their forecasts - until they don’t; at which point the stock price will adjust quickly.
Why do you think SKX gets overlooked in the Motley Fool Universe?
Sketcher’s was in the Motley Fool universe a few years ago. They were sold in 2012 and 2013 because the advisor believed that they had reached their fair value. Here is a snippet:
At nearly $23 per share, Skechers (NYSE: SKX) is trading about 6% higher than our valuation estimate of $21.50 per share. We’d sold chunks of Skechers before, but since our valuation models tend to be conservative, we held on to this last piece in hopes we could wring out just a bit more return. We’re pleased that has worked according to plan.
6%? Really? 6%?! The word is estimate for a reason, no one knows for sure. Pretty soon this stock will be within 6% of $100 a share.