DECK Stock Forecast: Time to Buy UGG and Its Shares

Yu YaoThis DECK Stock Forecast article was written by Yu Yao – Financial Analyst at I Know First.

Summary

  • DECK has a strong premium brand moat
  • The financial health of DECK is in great condition
  • The valuation model indicates that DECK is currently undervalued with a 21% upside potential

Overview

(Source: Wikimedia Commons)

Founded in 1973, Deckers Outdoor Corporation (DECK) is a worldwide leader in designing, marketing, and distributing footwear, apparel, and accessories for both everyday casual lifestyle use and high-performance activities. Deckers Outdoor’s primary brands include UGG, HOKA, Teva, Sanuk, and Koolaburra.

Premium Brand Moat of DECK and Diverse Product Portfolio

(Source: Wikimedia Commons)

DECK had a strong quarterly revenue growth for Q1 2023, compared to the previous year. Revenue for Q1 2023 was $614.5 million, representing a 21.75% growth from last year.

(Source: Bloomberg)

DECK’s primary source of revenue is from its fashion brand UGG, accounting for 62.9% of revenue in FY2022. UGG brand is DECK’s most iconic and recognized brand in the industry and sells comfortable and fashionable footwear mainly for the winter. However, UGG used to take up to 80% of DECK’s total revenue and investors may be concerned about DECK’s revenue concentration.

The rapidly growing brand HOKA of DECK is eliminating that concern. HOKA brand is an authentic, premium line of year-round performance footwear and apparel offering enhanced cushioning and inherent stability with minimal weight. As shown in the chart below, HOKA grew 56% from FY2021 to FY 2022, the fastest-growing brand of DECK.

DECK is also determined to diversify UGG’s portfolio of products to decrease the cyclicality and smooth sales all year round across the world. Since UGG is still the main source of revenue for DECK, DECK is expected to generate much higher revenue and earnings figures in the next two quarters as the weather gets colder.

(Source: Bloomberg)

DECK Has a Strong Balance Sheet

DECK has the best leverage ratios compared to its peers. It has negative net debt while the median for Net Debt/EBITDA of its competitors is positive 2.56. The Total Debt / Total Assets ratio of DECK is also the lowest among its comparable companies.

(Source: Bloomberg)

Besides its extremely low leverage condition, DECK’s revenue growth, margins, and return ratios are all higher than the median of its comparable peers as shown in the chart below. While ROE is slightly lower than the median, DECK is the second most profitable company among its peers, following Crocs. 

(Source: Bloomberg)

Valuation Model Indicates DECK is Currently Undervalued

Based on a five-year DCF model shown in the Figure below, the one-year target price of DECK stock is $355.54, inferring a 14% upside from the current price of $314.14 as of September 26, 2022. When comparing the current market price to the intrinsic value, DECK is slightly undervalued as shown in the Figure above.

The main assumptions made are revenue growth rates and margins based on historical data and macroeconomic expectations. The revenue growth rate assumption for 2023E is 10.6% and the gross margin is 52% based on company guidance. The tax rate is assumed to be 20%. WACC is 9.5%. The perpetuity growth rate assumption is assumed to be a conservative 2%, which is slightly lower than the US GDP growth rate average.

Source: Bloomberg

As shown in the figure above, DECK has higher than median multiples, making it more expensive than its peers. But as mentioned above, DECK has much better margins and return ratios than its competitors’ median.

Based on Yahoo Finance coverage for DECK as shown in the figure below, out of 16 analysts: 5 take Strong Buy and Buy positions, 10 take the Hold position, and 1 take the Underperform or Sell position.

The analysts’ community puts the average target price for the stock at $389.38 while it is currently traded at $314.14 as of September 26, 2022.

Source: Yahoo Finance

Conclusion

Based on all the analysis above, I take a BUY side on DECK stock. Both the DCF valuation model and Yahoo Finance coverage supports my recommendation that the stock is currently undervalued. The one-year target price of $359.15 calculated by the DCF model represents over 14% upside from its current price of $314.14 as of September 26, 2022.

I Know First DECK Stock Forecast

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the DECK stock forecast. The light green for the short-term forecasts is mildly bullish, while the darker green is a strong bullish signal for the one-year forecast.

I Know First Premium article

To subscribe today click here.

Please note-for trading decisions use the most recent forecast.