Athletic apparel company Skechers USA Inc (NYSE:SKX) is set to announce first-quarter earnings after the bell on Thursday, and I think SKX stock is a screaming buy headed into that report.
SKX stock has all the makings of a stock that could explode on a good report. The stock is cheap from both a relative and absolute valuation standpoint.
The stock has also sold off recently and is well off its recent $30 highs. Certain spring 2017 tailwinds imply we could get both good Q1 results and a strong Q2 guide. There has been some big insider buying.
SKX stock looks good here, and it all starts with the fact that Skechers has had quite an impressive spring.
Skechers Had a Big Spring
It looks like Skechers had a really strong finish to Q1 and an even stronger start to Q2.
Web traffic analytics site SimilarWeb shows that Skechers.com web traffic spiked in March 2017 to near holiday-season levels. SimilarWeb also shows that Skechers.com’s popularity relative to other websites is trending up. This is true globally, in the U.S., and specifically among clothing websites.
Meanwhile, Alphabet Inc’s (NASDAQ:GOOGL, NASDAQ:GOOG) Google Trends shows similar bullish online trends for Skechers. On both a worldwide and domestic basis, search interest in “Skechers” is soaring to multi-year highs. The March/April months are always strong for Skechers search interest, but the past two months have been unusually strong. April 2017 stands out as the best month in multiple years. That is good for SKX stock, because it also implies that a good guide may be in store.
The fundamental backdrop for SKX stock supports Google Trends and SimilarWeb data. Skechers is the title partner of the LA Marathon, which happens in March every year. That is a natural business tailwind every spring, but this year has a different feel.
SKX placed over 40 Snap Inc (NYSE:SNAP) geofilters across the LA Marathon. This is huge, because SKX has long been shunned by the younger demographic. Teens have recently opted for trendier brands like Nike Inc (NYSE:NKE), Under Armour Inc (NYSE:UAA) and Lululemon Athletica inc. (NASDAQ:LULU). This leveraging of teen-focused social technology at a big event may be a critical turning point in capturing the young consumer.
Skechers also continued its push into the Ironman market after last year inking a dealing to sponsor the Ironman European Tour. Overseas, Skechers is opening sleek new stores in Europe, and that is key to driving global mind-share growth. The bankruptcy of shoe retailer Payless ShoeSource could also trigger a sales tailwind for SKX stock, considering comparable product price points.
All in all, it looks like Skechers had a great quarter from an operational standpoint. It also looks like multiple tailwinds should continue to drive operational growth. With those two things checked off, it now comes down to valuation on SKX stock.
SKX Stock Is Too Cheap
Relative to peers, SKX stock is dirt cheap.
SKX stock trades at 12.4 times next year’s consensus earnings estimate. Meanwhile, NKE stock trades at a 21.8 times forward earnings multiple, UAA stock at 36.6 times, and LULU stock at 19.6 times.
That big of a discrepancy makes no sense, especially considering SKX is actually expected to grow faster than its peers.
Analysts see Skechers earnings growth over the next two years at around 13% per year. For Nike, that figure stands around 9% compounded growth. UAA is around 8% and LULU is around 11%. So Skechers is expected to grow earnings at a faster pace than its peers, yet SKX stock trades a significant discount.
I like that setup from a relative valuation standpoint. From an absolute valuation perspective, the pairing of good growth prospects (13%) with a low buy-in multiple (12.4-times) should result in strong SKX stock price appreciation over the next several months.
Bottom Line on SKX Stock
SKX stock is cheap. It looks like Skechers just had a big quarter. The stock is significantly off its recent $30 high. The setup looks compelling for SKX stock to soar on a good report.
It also gives me confidence that the CEO bought a whole bunch of SKX stock (500,000 shares) back in November 2016. His average purchase price of around $22 per share isn’t too far below where SKX stock currently trades. I like being aligned with management, especially at a similar cost basis.
All in all, I like SKX stock here. I think it’s a buy into the report, and maybe even a better buy if the stock drops on Friday.
As of this writing, Luke Lango was long SKX stock.