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SKX Stock Study (7-18-24)

Posted by on September 5, 2024 at 06:26 | Last modified: July 18, 2024 11:31

I recently did a stock study on Sketchers USA Inc. (SKX) with a closing price of $65.28.

M* writes:

     > Skechers USA Inc is a lifestyle footwear company under the
     > Skechers GO brand name. Products offered include various
     > styles of women’s shoes, men’s shoes, girl’s shoes, boy’s
     > shoes, performance shoes, and work shoes. Allied products
     > offered are apparel, bags, eyewear, toys, and more. Its
     > products are available for sale at department and specialty
     > stores, athletic and independent retailers, boutiques, and
     > internet retailers. The company’s operating segments
     > includes Wholesale and Direct-to-Consumer. It generates
     > maximum revenue from the Wholesale segment.

Over the past 10 years, this large-size company has grown sales and EPS at annualized rates of 13.0% and 12.4%, respectively. Lines are mostly up, straight, and parallel except for a sales + EPS decline in ’20 and additional EPS dips in ’17 and ’22. 5-year and 10-year EPS R*2 of 0.21 and 0.34, respectively (improves to 0.60 and 0.81 if ’20 and ’21 are excluded), are poor in support of Value Line’s lackluster Earnings Predictability score of 40.

Over the past decade, PTPM leads peer averages but trails the industry in ranging from 7.0% in ’22 to 10.6% in ’15 with a last-5-year mean (excluding 3.4% in ’20) of 9.0%. ROE also leads peer averages while trailing the industry in ranging from 4.1% in ’20 to 26.0% in ’21 with a last-5-year mean of 14.0%. Debt-to-Capital is less than peer and industry averages with a last-5-year mean of 35.0%.

Value Line gives a B++ grade for Financial Strength and Interest Coverage of 33.1. M* reports Quick Ratio of 1.4 and assigns a “Narrow” Economic Moat [quantitative] to the company.

With regard to sales growth:

I am forecasting below the range (assuming the aforementioned is in error) at 7.0% per year.

With regard to EPS growth:

My 11.0% forecast is below the long-term-estimate range (mean of four: 17.4%). Initial value is ’23 EPS of $3.49/share rather than 2024 Q1 EPS of $3.80 (annualized).

My Forecast High P/E is 18.0. Over the past decade, high P/E decreases from 23.8 (’14) to 18.3 (’23) with a last-5-year mean (excluding 69.5 in ’20) of 17.7 and a last-5-year-mean average P/E of 14.1. I am near bottom of the range [’18 is less (11.8)].

My Forecast Low P/E is 9.0. Over the past decade, low P/E ranges from 7.2 in ’21 to 19.6 in ’17 with a last-5-year mean (excluding 26.7 in ’20) of 10.5. I am forecasting near bottom of the range (only ’21 is less).

My Low Stock Price Forecast (LSPF) is $45.60. Default ($31.40) based on initial value from above seems unreasonably low at 51.9% less than the previous close and 31.1% less than the 52-week low. Instead, I am using the 52-week low: 30.1% less than the previous close.

These inputs land SKX in the HOLD zone with a U/D ratio of 1.2. Total Annualized Return (TAR) is 10.1%.

PAR (using Forecast Average—not High—P/E) of 4.0% is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 73 studies (my study and 43 outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 10.5%, 11.4%, 18.0, and 11.0, respectively. I am equal on Forecast High P/E and lower on the rest. Value Line’s projected average annual P/E of 17.0 is higher than MS (14.5) and higher than mine (13.5).

MS high / low EPS are $6.43 / $3.67 versus my $5.88 / $3.49 (per share). My high EPS is less due to a lower growth rate. Value Line’s high EPS of $6.85 is greater than both.

MS LSPF of $43.00 implies a Forecast Low P/E of 11.7: greater than the above-stated 11.0. MS LSPF is 6.5% greater than the default $3.67/share * 11.0 = $40.37 resulting in more aggressive zoning. MS LSPF is 5.7% less than mine, however.

With regard to valuation, PEG is 0.93 and 1.4 per Zacks and my projected P/E, respectively: fairly valued. Relative Value [(current P/E) / 5-year-mean average P/E] is elevated at 1.22.

MOS is robust because my inputs (including most-recent-quarter initial value) are near or below respective analyst/historical ranges and MS averages. Despite all this, MS TAR of 11.5% is only 1.0% per year greater than mine.

As flagged in an audit note, my Forecast High P/E exceeds the 5-year average P/E. Excluding ’20 (unusually high due to COVID) but including ’21 (unusually low as stock price rebounded) is the cause, which also pushes Relative Value higher.

For a company with pretty good fundamentals, the biggest detriment is ~22% stock appreciation over the last year.

Per U/D, SKX is a BUY under $50/share. BI TAR criterion is met < $53/share (puzzling to see the latter exceed the former) given a forecast high ~$106.

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