The shares of Skechers USA Inc. (SKX) are up about 11% over the past twelve months, and I think there’s more upside ahead. I’ll go through my reasoning below by focusing on the financial history here, and by talking about the stock relative to the overall market. I’ll also make a forecast of future price action by looking at the growth in retained earnings here.
A quick review of the recent financial history of Skechers suggests that this is a growth company. For example, both revenue and net income have grown dramatically over the past five years (revenue is up at a CAGR of 18% and net income is up at a CAGR of about 45% over the same period). Earnings per share have grown less dramatically, as the share count has generally expanded over the past few years. It seems that people like these shoes.
Turning to the capital structure, the level of debt here isn’t much of a concern to me, in spite of the fact that most of it (92.3%) is due in 2020. First, the company has a strong history of repaying debt. Over the past five years, for example, it has paid down about $ 44 million of debt. Parallel to that is the fact that the interest expense has dropped dramatically over the past five years (at a CAGR of about 16%), suggesting that the company certainly isn’t hamstrung by the level of debt present. Finally, the level of cash on the balance sheet absolutely swamps the level of debt, so there’s little risk from debt here.
The one dark cloud is the dilution present. In my view, the company generates enough cash from operations to fund anything it needs. So my advice to management would be to initiate a share buyback program of some kind. If this doesn’t materialise in the next two years, I’ll reconsider my bullish thesis here.
Forecasting Future Price
Although I usually like to look at the relationship between future price and dividend, I can do the same work on a company that doesn’t pay a dividend. Miller-Modigliani indifference suggests that a company that doesn’t pay dividends is just as easy to value as one that does; so here goes. As usual, I’ll engage in a ceteris paribus assumption when making this forecast, as it is easier to make a forecast by focusing on only one variable.
Over the past five and a half years, the retained earnings per share have grown at a compounded rate of about 17.5%, which is quite impressive. In order to be as conservative as possible, I’ll assume that the growth rate drops by about 40% over the next three years. There’s no reason to suggest that the business will slow this dramatically in future, but I prefer my surprises to be pleasant ones. When I perform this forecast, I infer a CAGR for the shares of just shy of 10% from now until the end of 2021. I consider this to be a very reasonable rate of return given the relatively low risks present.
As per our ChartMasterPro Daily Trade Model, the trend for SKX would turn bullish with a daily close above $ 25.50. This would signal a bullish breakout from an Ascending Triangle pattern and a bullish break of a downtrend line on the daily charts which began on August 28. From here we see the shares climbing to the $ 28.00 level over the next three months.
We will buy SKX call options when the shares post a daily close above $ 25.00. Our initial stop-loss exit signal will be a daily close below $ 24.75.
For investors in the shares, we recommend that you hold for three months or $ 28.00, whichever comes first. For longer-term investors (years, not months), we believe SKX is a solid addition to any growth portfolio over the next four years.
Investing is, by definition, a relativistic process. This means that we must eschew A in order to buy B. In my view, it makes the most sense to buy those companies that are safer than their peers and the overall market. My definition of “safe” includes those companies that trade at a cheap price, as they have less far to fall in the event of a market drop. A dollar of future earnings for $ 17 is, by definition, safer than buying $ 1 of future earnings for $ 24.
At the moment, the shares of Skechers are trading at a 27% discount to the overall market, which suggests to me that they are safer. In addition, the shares are trading on the low end of their average P/E:
To summarise, this is a growth company that trades like a value company. The retained earnings are growing at a very decent clip, while the shares are near close to a P/E low. In my view, it would be wise to keep an eye on dilution, but apart from that this is a perfect investment at the moment. I am long Skechers and suggest that investors with a long-time horizon do the same.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in SKX over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We trade options. Sometimes our trades last a few days, sometimes a few weeks, sometimes a few months. Please review our trade history listed in our Seeking Alpha BlogPost to get a feel for our trading style.