M&A activity in the financial markets is picking up, as record levels of corporate cash converged on a steep market sell-off in late 2018 to create a plethora of acquisition opportunities, and corporations took advantage. Thus, it’s no surprise that M&A rumors have started to swirl around athletic apparel brand Skechers (NYSE:SKX). Specifically, there has been chatter that global apparel giant V.F. Corporation (NYSE:VFC) is interested in buying Skechers at $40 per share.
Skechers stock trades just north of $25. Naturally, the stock bounced higher on those rumors.
Wells Fargo is skeptical such an acquisition will actually happen. Their rationale — that Skechers doesn’t really fit into the VFC wheelhouse — makes sense. VFC’s biggest brands include names like Vans, Timberland and North Face. Those have some, but minimal, overlap and synergies with Skechers.
As such, a VFC acquisition of Skechers seems unlikely at this point in time.
But, that doesn’t mean Skechers stock won’t be acquired in 2019 at a big premium. Instead, this rumor goes to show that there is high M&A interest related to Skechers, as there should be. The company and stock have “buyout target” written all over them. Thus, as M&A activity picks up in 2019, Skechers stock could very likely be acquired by a bigger retail company looking to expand into the athletic apparel space.
VFC May Not Be the Buyer
The rumor floating around is that VFC will buy Skechers at $40 per share. Skechers stock initially traded higher on the news. Then, it gave up some of those gains as investors questioned the legitimacy of the rumors.
Investors are right to express skepticism. VFC has built a portfolio of global apparel brands through acquisitions. In the 1960’s, VFC acquired leading jeans brand Lee. Over the next fifty years, VFC acquired Wrangler, Bulwark, North Face, Nautica, Vans, Reef, Timberland, and many, many more. This M&A activity hasn’t slowed recently. Over the past decade, VFC has made numerous brand acquisitions, both small and large.
But, Skechers doesn’t really fit into the VFC wheelhouse. Skechers is an athletic apparel brand which rubs elbow with Nike (NYSE:NKE), Adidas (OTCMKTS:ADDYY), and Under Armour (NYSE:UAA). There isn’t much overlap between Skechers and North Face, or Skechers and Vans.
Granted, VFC could be looking to make a play in an entirely untapped mainstream athletic apparel market. That would make sense. After all, the athletic apparel market is where all the growth is today. Skechers gives them a cheap entry into that big growth market.
But it isn’t likely, because VFC usually acquires companies within its wheelhouse. As such, VFC probably won’t buy Skechers any time soon.
But Skechers Is a Buyout Target
Although VFC likely won’t be the buyer, Skechers stock is a serious buyout target in 2019.
The company has all the characteristics you’d want in a buyout target. Skechers has grown revenues at a consistent double-digit rate over the past five years, and has broad and global exposure to the rapidly growing athletic apparel market. Gross margins are high, and have consistently trended higher over the past five years. The brand clearly has staying power in the mid-price sneaker market, which is largely ignored by other athletic apparel companies. The domestic business is stable, while the international business is red hot.
In sum, this is a growth company with staying power and high margins in a growth industry. Those are attractive features to a potential suitor.
Skechers stock also has ideal characteristics for a buyout target. There’s a lot of cash and short-term investments on the balance sheet (~$900 million), and hardly any debt (less than $70 million in long-term debt). Thus, the company has a net cash position of roughly $800 million, meaning the $4.2 billion market cap underlying Skechers stock translates into a $3.4 billion enterprise value.
Sales over the past twelve months measure $4.5 billion, while EBITDA is around $520 million. Thus, Skechers stock is trading at roughly 0.7X EV/Sales and ~6.4X EV/EBITDA. Those are anemic multiples for a double-digit-growth company. A potential suitor could pay a huge premium for Skechers stock, and still only pay just over 1X EV/Sales.
Overall, Skechers the company has buyout target written all over it. So does Skechers stock. As such, while VFC may not be the buyer, that doesn’t mean the idea itself is off the table in 2019.
Bottom Line on SKX Stock
Skechers is a solid and stable growth company with a dramatically undervalued stock. That combination naturally attracts M&A interest. If Skechers stock remains this cheap for much longer, there will eventually be a takeout offer — and likely at a huge premium.
As of this writing, Luke Lango was long SKX and NKE.
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