ODd how a higher interest rate would be considered our friend now but one has to realize how despite Deckers earning 89M in cash in 2012, the stock over the last 22 months went from its all-time high to 5 year lows in 10 months and erasing 75.6% of value; yet the company was still making plenty of cash.
So what happened? Well, in hindsight one can now see that sheepskin costs rose for two consecutive years, totaling an 80% increase and having a 40% hit to our bottom line. So then why the 75.6% drop? Well, interest rates on the ten year got as low as 1.5%, so not only did an investor have to consider the fact that sheepskin costs could rise, but now one can just invest in a walmart, mcdonalds and coke and get more than double the return of the ten year in dividends from those bellweather companies that seem to be recession proof and/or have complete international exposure.
So Deckers and its "risks" becomes less attractive no matter how much cash it is earnings. But NOW the ten year is up almost 80% off the lows of 1.5% set about a year ago and now a lot of those "bellweather" companies like coke, mcdonalds, etc have dividends that are no longer as attractive considering the ten year and those companies values are out of proportion to how much C A S H they actually earn.
So now money is on the prowl for the companies that make more return on value in cash(cash/present value) and they re basically going to be looking for those companies like Deckers whose cash production when divided by the business's value(89.5M/1.94B=5%) offer a better return than the ten year by almost 80%.
They will then do further research and see companies like DECKERS will earn more cash this coming year in all likelihood due to raised guidance and 11% lower sheepskin costs.
They will then due EVEN FURTHER research and notice that deckers is GROWING its store count from 70 in 2012 to 200+ by 2016, growth of 140%.
They will then do MORE research and realize management has created a product
called UGG PURE which management is forecasting should help the company get back to double digit profit margins over the next few years(hopefully by 2015 based on management's incentives). Investors will then realize that if management is forecasting double profit margins and significant savings from UGG PURE, then that means in all likelihood even without growth, cash should increase going foward over the next few years.
With growth, they can see it will grow even more than just the double profit margin effect.
So then they will logically conclude over the next 3 years, at different times because most fund managers are idiots, that Deckers is a keeper and offers better rewards than 99% of the stocks in the market based on its cash flow and the brand popularity worldwide.
Why would I sell my business(DECKERS) at 3 year lows when the management of my business has come out with a product that is going to potentially double my business's profit margins and increase my bottom line over the next 60 months?
Why would I sell at 3 year lows when my companies ability to produce cash is going to increase potentially 100% over the next 60 months and my companies product is the most popular product in the winter?