Tapestry, Inc. (NYSE:TPR) shares are up more than 26.73% this year and recently increased 0.25% or $0.11 to settle at $44.38. Skechers U.S.A., Inc. (NYSE:SKX), on the other hand, is up 55.90% year to date as of 12/22/2017. It currently trades at $38.32 and has returned 0.50% during the past week.
Tapestry, Inc. (NYSE:TPR) and Skechers U.S.A., Inc. (NYSE:SKX) are the two most active stocks in the Textile – Apparel Footwear & Accessories industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect TPR to grow earnings at a 10.04% annual rate over the next 5 years. Comparatively, SKX is expected to grow at a 13.00% annual rate. All else equal, SKX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 11.9% for Skechers U.S.A., Inc. (SKX). TPR’s ROI is 13.50% while SKX has a ROI of 17.70%. The interpretation is that SKX’s business generates a higher return on investment than TPR’s.
Cash is king when it comes to investing. TPR’s free cash flow (“FCF”) per share for the trailing twelve months was -0.86. Comparatively, SKX’s free cash flow per share was +0.26. On a percent-of-sales basis, TPR’s free cash flow was -5.45% while SKX converted 1.16% of its revenues into cash flow. This means that, for a given level of sales, SKX is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. TPR has a current ratio of 1.70 compared to 3.50 for SKX. This means that SKX can more easily cover its most immediate liabilities over the next twelve months. TPR’s debt-to-equity ratio is 0.91 versus a D/E of 0.04 for SKX. TPR is therefore the more solvent of the two companies, and has lower financial risk.
TPR trades at a forward P/E of 16.24, a P/B of 4.28, and a P/S of 2.66, compared to a forward P/E of 17.82, a P/B of 3.17, and a P/S of 1.53 for SKX. TPR is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock is not necessarily a value stock. Most of the time, a stock is cheap for good reason. A stock only has value if the current price is substantially below the price at which it should trade in the future. TPR is currently priced at a -8.66% to its one-year price target of 48.59. Comparatively, SKX is -2.57% relative to its price target of 39.33. This suggests that TPR is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.20 for TPR and 1.50 for SKX, which implies that analysts are more bullish on the outlook for TPR.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. TPR has a beta of 0.48 and SKX’s beta is 0.14. SKX’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. TPR has a short ratio of 3.17 compared to a short interest of 1.73 for SKX. This implies that the market is currently less bearish on the outlook for SKX.
Skechers U.S.A., Inc. (NYSE:SKX) beats Tapestry, Inc. (NYSE:TPR) on a total of 12 of the 14 factors compared between the two stocks. SKX , is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, SKX is the cheaper of the two stocks on book value and sales basis, Finally, SKX has better sentiment signals based on short interest.