Start Buying Deckers Outdoor for Holiday Season

Deckers Outdoor Corp. (Nasdaq: DECK)                                11/14/2012         Last Price: $29.74

VIEW:  START BUYING

Deckers Outdoor Corp. designs, markets, and produces athletic and high-end casual footwear. Deckers primary brands consist of the UGG (87.54% of sales in 2009) and Teva (9.55%) brands, while secondary brands (2.91%) include the Simple, TSUBO and Ahnu brands. The UGG brand designs and produces Australian sheepskin boots, while the Teva line consists primarily of high-end sandals. The company sells its products to select retailers as well as through company-owned retail stores and e-commerce.

Sector: Consumer Goods                              Industry: Textile – Apparel Footwear & Accessories

Highlights:

Deckers Outdoor Corporation manufactures, sells, and distributes casual, athletic, and outdoor-friendly footwear to customers in Europe, Canada, Australia, Asia, Latin America, and the United States.  The stock closed yesterday’s trading session at $29.74.  In the past year, the stock has hit a 52-week low of $28.53 and 52-week high of $109.98.  Technical indicators for the stock are neutral and a 75% sell off off last year high is overdone,  despite the revenue growth slowdown and margin pressure.

GROWTH AND BALANCE SHEET

DECK reported third quarter revenues of $376.4 million, down 9.2% on the year. Gross margin was 42.3% compared to 49.0% for the same period last year. Diluted earnings per share fell off of $1.59 per share to $1.18 per share. UGG® brand sales decreased 11.6% to $332.8 million compared to $376.7 million for the same period last year. For the full year of 2012, Deckers expects to increase annual sales by some 5%. The total Debt/Equity of 40.30% is high enough but we expect the management to drive it down as it holds enough cash.

VALUATION

DECK has a PEG ratio of 1.21 above the industry average. Current PE at DECK stands at 7.36, way below than most of its peers in the industry and that makes the stock very attractive at current levels. The stock is currently trading far below its intrinsic value of $43. The beta of 0.82 implies low volatility of the stock with respect to the S&P 500. The company currently does not pay a dividend. We are positive for the firm’s future prospects and valuation as the price has discounted all the bad developments.

RECOMMENDATION for next 6 months: We initiate our coverage with START BUYING. The company has demonstrated a pattern of neutral technical signs. Shares are down 60.41% year to date as of the close of trading yesterday. Our overall score for DECK is 6.58

For options trading we suggest:

• Buy the January 13  call with a strike of 32.50 priced at $2.00 per contract
• Sell the January 13  call with a strike of 40 priced at $0.55 per contract
• Net Debit to start: $1.45
• Maximum risk: Net debit

DECK Strengths

• Brand Name
• UGG Popularity
• Uniqueness

DECK Weakness

• Mature Market
• High leather cost

Stock valuation model

The model rates stocks 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

DECK’s intrinsic value is $43.00 the current price is $29.74, the stock trades 45% below its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

We are searching for EPS numbers that are better than the previous year’s. One dip is allowed, but the following year’s earnings should be higher than the previous year. DECK’s annual EPS for the last 5 years were 1.69, 1.87, 2.96, 4.03, 5.07 this type of earnings action is favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

DECK’s Total Debt/Equity of 40.30% is not acceptable.

EPS This Quarter VS Same Quarter Last Year

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

DECK’s EPS growth for this quarter relative to the same quarter a year earlier is -25.0% well below our target.

Annual Earnings Growth

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%.

DECK annual earnings growth rate over the past five years is 45.00%, well above our target growth rate.

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

DECK’s 52 week high is $109.98 current price is $29.74, is far below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 7.36 the average industry P/E ratio is 14.71 and is also below the S&P 500 P/E ratio of 15.30

Insider Ownership

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 2.54% of DECK stock. Management’s representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

DECK stock has been showing support around $28.60 and resistance in the $38.80 range. Our indicators give a neutral to bearish view on DECK.