At the beginning of the year, I put together a list of seven dark horse stocks that I felt were ready to surprise Wall Street in 2019 and stage huge rallies. One of my favorite picks on that list was Skechers (NYSE:SKX), the underappreciated and undervalued athletic footwear stock that seemed ready for a big 2019 surge, as favorable fundamentals converged on a hugely discounted valuation.
That’s already happened. Year to date, SKX stock is up more than 40% on the back of strong holiday numbers and a healthy guide, which, together, implied that the good about Skechers is getting better and that the bad is turning around.
Up 40% in just over two months, SKX stock may appear to out over its skis here and it may be — in the near term. But, in the medium- to long-term, this stock will only head higher.
Why? Because it is still an underappreciated and undervalued athletic footwear stock that will continue to benefit from favorable fundamentals converging on a discounted valuation. So long as this dynamic remains in play, SKX stock will continue to rally. By my math, that dynamic will remain in play until the stock reaches $40.
As such, buying here in the low $30’s isn’t too late. A good portion of the 2019 SKX rally hasn’t happened yet.
The Consumer Backdrop Is Healthy
Importantly, the global consumer backdrop is healthy enough to support continued positive revenue growth at Skechers.
Specifically, the U.S. economy appears to be stabilizing and consumer confidence is stabilizing with it. After three consecutive months of declines, U.S. consumer confidence ticked higher in February, concurrent with a stabilization in financial markets. Also, while the February jobs report missed on the headline jobs creation number, wages posted their best growth in a decade and the unemployment rate retreated back to record lows. Overall, the U.S. consumer is still very healthy today.
The global consumer is healthy, too. China consumer confidence is bouncing back. Global consumer confidence is stabilizing. U.S.-China trade tensions are easing. FX headwinds are becoming less severe. As a result, the global consumer backdrop remains healthy enough to support continued growth at Skechers.
The Internals Are Favorable
More importantly, the internals at Skechers remain healthy, and point to continued growth at the company for the foreseeable future.
Ground-level trends remain favorable, such as the chunky sneaker and dad-look trends, and point to continued growing global popularity of the Skechers brand. Search-interest trends remain favorable on a domestic and global basis. Web traffic share continues to climb. Overall, the fundamentals imply continued healthy top-line growth for Skechers on a global basis.
Concurrently, gross margins have continued on their multi-year uptrend, while the opex rate is finally falling back. Management expects this opex rate moderation to persist, and so long as it does, margins should remain on an uptrend.
In the big picture, then, current trends and data points suggest that Skechers will remain a strong revenuer grower with healthy margin expansion potential for the next several quarters.
The Valuation Is Still Discounted
Even more importantly, the valuation underlying SKX stock remains discounted relative to peers.
Skechers trades at just 15 forward earnings. For comparison purposes, Nike (NYSE:NKE) and Lululemon (NASDAQ:LULU) both trade at over 30 times forward earnings. Under Armour (NYSE:UAA) trades at over 60 times forward earnings. V.F. Corp (NYSE:VFC), the owner of Vans, trades at 22 times forward earnings.
Further, most apparel retail stocks trade around 18 times forward earnings. The average forward P/E multiple across the entire consumer discretionary sector is 20. For footwear stocks, it’s nearly 30.
Overall, with a forward P/E ratio of just 15, SKX stock continues to trade at a sizable discount to essentially every comp in the market.
Upside to $40 Is Fundamentally Supported
Most importantly, the fundamentals support upside in SKX stock to $40.
Given historical growth trends, its still relatively small revenue base, and red-hot growth in the international segment, I think Skechers projects as a mid- to high-single-digit revenue grower over the next several years. During that stretch, gross margins should continue on their multi-year uptrend, since there are no obstructions in the foreseeable future, while the opex rate should normalize lower as revenue growth outpaces expense growth.
Under those assumptions, I think Skechers can do about $4 in EPS by fiscal 2025. Based on a market average 16 forward multiple, this equates to a fiscal 2024 price target for SKX stock of $64. Discounted back by 10% per year, that equates to a fiscal 2019 price target of roughly $40.
Bottom Line on SKX Stock
Skechers stock was one of my top picks for 2019. It’s early March, and the stock is already up more than 40% year to date. But this rally isn’t over. Skechers remains an underappreciated and undervalued athletic footwear stock with plenty of room to run higher as favorable fundamentals continue to converge on a discounted valuation in 2019. This dynamic should drive SKX stock to $40 by the end of the year.
As of this writing, Luke Lango was long SKX and NKE.
