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Is It Too Late to Buy Skechers Stock?

Shares of footwear company Skechers (NYSE: SKX) have had quite a year. The stock is up nearly 50% year to date, trouncing the broader market by a wide margin. Skechers' results in the past few quarters have been impressive, featuring a return to double-digit revenue growth driven by strong demand for its products in international markets. With international wholesale revenue soaring 25% during the third quarter, the growth story may be far from over.

With the stock up so much, those who missed Skechers' run this year may be asking themselves: Is it too late to invest in the company? The stock is nowhere near as cheap as it was just a few months ago, but it's still not a bad deal, all things considered.

Image source: Skechers.

No longer a bargain, but not expensive either

Skechers trades for around $36 per share, giving it a market cap of roughly $5.7 billion. That's up from less than $24 per share in early October, prior to the company's most recent earnings report. Over the past 12 months, Skechers has produced earnings of $1.61 per share. That puts the price-to-earnings ratio at about 22.

That may seem high, but analysts expect Skechers' earnings to grow substantially in 2018. The average analyst estimate currently sits at $2.12 per share, making the forward P/E ratio a lower 17.

These ratios ignore Skechers balance sheet, which has the effect of making the stock appear more expensive than it really is. At the end of the third quarter, Skechers had $803 million of cash and cash equivalents and just $84 million of debt. That's good for a net cash balance of $719 million.

If you back out that net cash and recalculate the P/E ratios, here's what you get:

Metric

Value

Cash-adjusted trailing P/E ratio

19.8

Cash-adjusted forward P/E ratio

15.0

The S&P 500, by the way, trades for around 25 times trailing-12-month earnings. Even after a near-50% run, Skechers stock still trades at a discount to the broader market no matter how you look at the numbers. The gap was much bigger earlier this year, when the stock was squarely in the $20 range. But you can still buy shares of Skechers at a valuation that isn't all that optimistic, especially considering the company's growth prospects.

Firing on all cylinders

After a few quarters of sluggish growth in late 2016 and early 2017, Skechers has put up two consecutive quarters of 15%-plus year-over-year revenue growth. That's a far cry from the 25%-plus growth the company was posting as recently as early 2016, but it's impressive nonetheless.

The international business has been the main driver of this growth, but the retail business is also doing well. Global company-owned retail comparable sales jumped 4.4% during the third quarter. Comparable sales rose 3.1% domestically despite temporary store closures in Texas, Florida, and Puerto Rico due to this year's hurricanes.

The domestic wholesale business, while no longer a growth engine for the company, is holding up well, with sales growing by 1.4% year over year in the third quarter. The company pointed to a strong back-to-school season in its third quarter report, driven in part by double-digit growth in its Skechers Kids footwear.

Earnings growth has lagged revenue growth recently as the company invested in its business, but the third quarter showed signs that this may not be the case for much longer. Third-quarter operating income jumped 12.7% year over year while net income soared more than 40%. As long as the international business continues to grow at a double-digit pace, earnings should follow suit.

Not too late

Skechers stock is not a no-brainer bargain, but it does trade at a discount to the overall market despite its performance and growth prospects. Skechers was singled out earlier this week as a top idea for 2018 by Cowen & Co, with the Cowen analyst citing a valuation gap between Skechers and its peers, as well as category expansion opportunities. This came with a price target of $42 per share, which seems reasonable.

Skechers stock was a lot more attractive when it traded in the low-$20 range, but I think it represents growth at a reasonable price today. In an expensive market, Skechers looks like a solid choice going into 2018.

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Timothy Green owns shares of Skechers. The Motley Fool owns shares of and recommends Skechers. The Motley Fool has a disclosure policy.

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