Friday, October 29, 2010

3 Cases for DECK

Deckers Outdoor Corporation (DECK), the shoemaker that makes the "ugly shoes", UGG, just announced a stellar earnings report. As the winter draws closer, fans of UGG are contemplating buying another pair of UGG classic or a fancy Jimmy Choo collaboration while for people like me who don't own a pair of UGG yet may very well start thinking about getting one. Although I can't say UGG, as accessories, completely suit my tastes, I do think that DECK, as a compay, suit many criteria of my "BUY" list.

1. The Lure of UGG


Spotted on celebrities such as Sarah Jessica Parker, Nicole Ricci, Kate Hudson and the likes, UGG is not just another pair of furry, comfy , chunky boots, it is a fashion statement. 15 years after being acquired by DECK, UGG sales now carry over 90% of the sales of the company. The message is clear, the growth of UGG equals the growth of DECK.

UGG has demonstrated years of double digit growth. In the third quarter, UGG has once again turned in a 20% year-over-year growth. Well, one could very well argue that it is unrealistic to expect double digit growth forever. Granted this is a valid argument, another equally valid question is: If decelerating growth is inevitable, what would be the trigger events?

Given that the fashionable niche of UGG has been proven to be sustainable (by years of double digit growth), the trigger events include either a formidable competition in the category or saturation of markets. Neither is in sight yet.

2. International Expansion

Saturation of markets is unlikely for DECK in the next few years as there is still a lot of room for international expansion. International business carries only 26% of the company business. The company is just starting to gain traction in its international markets such as Europe and Asia, especially China (China of course). In the last quarter, international sales expanded as much as 48% over last year.

3. Valuation
DECK has a P/E of 16, on par with peers in the industry. This a very conservative multiple for a company that has demonstrated sequential double-digit growth. For a slightly higher multiple ranging from 18 to 20 and the current estimate of 2010 EPS, the stock should command a price ranging from $66 to $73.


Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author  is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.
Disclosure: The blog author does not own DECK in her personal account as of October 29, 2010
Related posts:
1. DECK and UGG continue to rock

DECK and UGG continue to rock

Deckers Outdoor Corporation (DECK) reported a stellar third quarter yesterday. 

Earnings Highlights
  • Net sales increased 21.7% to $277.9 million versus $228.4 million last year.
  • Gross margin improved 420 basis points to 47.1% versus 42.9% a year ago.
  • Diluted EPS increased 24.4% to $1.07 compared to $0.86 a year ago. The Company completed a three-for-one stock split, in the form of a stock dividend paid on July 2, 2010. All share and per share data in this release and accompanying tables have been adjusted to reflect the impact of such split for all periods presented.
  • UGG® brand sales increased 20.2 % to $255.8 million versus $212.8 million last year.
  • Teva® brand sales increased 51.7% to $13.7 million compared to $9.0 million a year ago.
  • International sales increased 48.2% to $73.2 million versus $49.4 million last year.
  • Retail sales increased 63.3% to $20.2 million compared to $12.3 million last year; same store sales rose 17.9%.
Outlook
Based on better than expected third quarter results combined with higher projected sales for the UGG and Teva brands, the company is raising its full-year outlook.
  • The company is expecting its full-year revenue to increase by 16% over 2009 level compared to 14% guided earlier. That comes up to $943.23 million. The average estimate by analysts is $941.41 million with a range from $931.34 to 977.7 million
  • The company now expects its full-year diluted EPSto increase approximately 22% over the non-GAAP diluted EPS of $2.98 in 2009, compared to previous guidance of approximately 16%. That comes up to $3.64. As of 10/28/2010, the average estimate by analysts is $3.52 with a range from $3.46 to 3.60.
  • A caveat lies in the 4th quarter guidance. The company does not change the 4th quarter guidance. It expects the 4th quarter revenue to be 8% over 2009 level. That comes up to $375.83. The average estimate by abalysts is $375.72 million with a range between $347.99 and 411.10 milion

 Source: Deckers Outdoor Corporation, finance.yahoo.com and author's own calculation

Wednesday, October 20, 2010

Is Netflix too expensive?

As high-speed internet becomes a household staple, Netflix has been stepping up its online-streaming video business. 66% of its subscribers watched streaming videos in the third quarter, up from 61% in the second quarter and 41% a year ago. Falling subscriber acquisition costs eased the earlier concern that it may become harder/costlier to get customers as competition emerged. Subscriber acquisition costs fell to $19.81 in the quarter, down from $24.37 in Q2, and $26.86 a year ago. Another important measure, the churn rate, which measures the percentage of customers dropping out was also very positive. Churn fell to 3.81%, from 4.0% in Q2, and 4.4% a year ago.

Guidance was upbeat. In the earnings result that was released today, the management raised the guidance of the number of subscriber this year to a range from 19 million to 19.7 million from a previous estimate of 17.7 million to 18.5 million. If this comes true, the company will have doubled its subscriber base in two years since its first streaming service. Revenue for the fourth quarter was also raised to $586 million to $598 million  from $580 million to $596 million. On the earnings side, the company continues to see the fourth quarter EPS of $0.59-0.74a share.

It was a very good earnings release, to say the least. What now? One question that lingers on is whether the stock of the company is too expensive.The company at its closing price today, $153.15 is 55 times its 2010 EPS and 41 times its 2011 EPS. This is way higher than conventional standard of P/E ratio. That said, many would argue that P/E ratio is irrelevant when it comes to growth stocks, PEG which is P/E divided by growth rate is more relevant. At a P/E of 55, Netflix will have to sustain a 55% or higher growth rate in the relevant time frame into the future. So, is this growth sustainable? We will leave this question to the next post.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.



Disclosure: The blog author does not have any position of NFLX in her personal account as of October 20, 2010

Monday, October 18, 2010

Is Macao Giving Casinos a Second Wind?


Casino stocks or otherwise known as gaming stocks tumbled during the financial crisis in 2008 when credit market closed itself to these highly leveraged companies and speculators betted on the collapse of them. Most of these companies lost over 90% of their stock prices over the crash since the peak in 2007.

As the economy is creeping up from the trough, these stocks have been seeing very bullish action this year. LVS, WYNN, MGM, MPEL have seen a rise in stock price as much as 150%, 50%, 10% and 50% respectively.

In addition to the domestic economic recovery, a very large extent of recoupment of losses of these stocks came from their oversea exposure, specifically, Macao for LVS, WYNN, MGM and MPEL and more recently Singapore for LVS. Macao has surpassed Las Vegas to be the largest gaming spot in the world. MPEL and LVS each has three casino properties while WYNN and MGM each has one in Macao. As of September, JP Morgan analysts' channel check showed that SJM carries the largest market share at 31.1% followed by 19.8% of Sands China which is owned by LVS, 10.4% of WYNN Macao owned by WYNN, Melco Crown 16.8% owned by MPEL, Galaxy 12.7% and MGM 9.2%.

According to Macao Gaming Inspection and Coordination Bureau, the gross gaming revenue has recovered sharply from 2009, with each month posting significant increase this year. As of September 2010, the gaming revenue has accumulated to as much as 133.2 billion MOP (equivalent to $16.4 billion).

  
Monthly Gross Revenue 
2010 
2009 
Variance 
Jan 
13,937 
8,575 
62.50% 
Feb 
13,445 
7,912 
69.90% 
Mar 
13,569 
9,531 
42.40% 
Apr 
14,186 
8,340 
70.10% 
May 
17,075 
8,799 
94.10% 
Jun 
13,642 
8,269 
65.00% 
Jul 
16,310 
9,570 
70.40%
Aug 
15,773 
11,268 
40.00% 
Sept 
15,302 
10,943 
39.80% 

No doubt Macao will be the most important source of growth for gaming companies in the world. The million- dollar-question for shareholders will be how much this growth is worth in terms of share prices?

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own any of the above mentioned stocks in her personal account as of October 18, 2010.

Economic Indicators on October 18, 2010

1. Industrial Production Index


The index came in lower than expected. Production declined by 2% in September versus an increase of 2% in August. It is much lower than the consensus of an increase of 2%. Capacity utilization was 78.7%, slightly lower than 78.8% in August and the consensus view of 78.8%

Industrial Production Index shows how much manucturing segments such as factories, mines and utilities are producing. Although the manufacturing sector carriess less than 20 percent of economic activities, it accounts for most of its cyclical variation. Consequently, this report has a big influence on market behavior.

2. Housing Market Index

The housing market index is a weighted average of separate diffusion indexes: present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes.

In Wall Street Journal

The housing market index rose three points in October to 16, a gain led by the expectations component yet also including gains for current sales and for traffic. Gains were also posted across regions. The report said financing remains scarce for both buyers and builders. The housing sector has been regaining its feet though the prospect of a foreclosure moratorium obscures the outlook. Housing starts will be posted tomorrow.

Saturday, October 9, 2010

3 cases for CROX




Crocs (CROX), known of its quirky, "ugly" clog-like sandals, the almost forgotten "hype" has seemed to make a come-back, in a different way, in a better way. The share price reached a new 52-week-high at $14.72 on Friday.

As a long-time follower of its stock since its IPO, and also a long-term fan of its product (I bought each one of my whole family members a pair of crocs and they love it!), I bring to you 3 cases for renewed optimism in the company:

1. High gross margin
I once had feared that the shoes might become just another commodity after the company used up its quirky brand power. By then, it would be hard for it to maintain high gross margin as it might have to lower the price point to compete with peers and more importantly, the knock-offs. However, CROX's management has averted this fate by employing supply-chain efficiency (e.g. moving distribution centers close to the target market) and introducing new, higher margin products. The gross margin in the second quarter of 2010 was a jaw-dropping 57.8%. In addition, the company managed to raise the average price to $17.76, up 12% from last year.

2. Expanded product lines
Before the financial crisis that almost announced the demise of the company, the former management had already had the plan of diversifying the product lines as this step was crucial to the sustainability and consistency of this once-one-trick-pony. The company now has gone from less than 25 styles/models to 250 models including a nice collection of warmer weather shoe wear and women's high-heels and pumps. The percentage of total revenue carried by the core products has dropped to 21%. Although colder seasons are still the weak spot for the company, it is on track to become a full-fledged shoemaker which will further strengthen its brand building.

3. Direct-to-consumer retail approach
Since the turmoil of the economy and also the company in 2007, the management has focused on switching more emphasis to direct-to-consumer channel from its previous wholesale approach. The company now runs 363 company-operated stores Not only does this approach vital to its future of brand-building, it also plays a crucial role in keeping the high gross margin.

In sum, CROX has emerged from its abysmal in a stronger way. Diversified products, prudent cost and inventory control and direct-to-consumer channel have led to and will continue to lead to more sustainable growth.

Disclaimer: This blog is for general information purpose only. Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.


Disclosure: The blog author owns CROX in her personal account as of October 9, 2010.