Heelys (NASDAQ: HLYS) has looked interesting to me for the past few months. Sure, it's a fad product that's way past its prime but look at the balance sheet: the stock is trading very close to its book value and has $96 million in cash on the balance sheet, compared with a market cap of just over $130 million. The company also has no debt.
Apparently Skechers (NASDAQ: SKX) sees some value here too. In a press release issued after the close of the market yesterday, Skechers announced that, on May 28th of this year, it had made a formal proposal to acquire Heelys. The proposal was rejected without being disclosed to shareholders, and now Skechers is taking the battle to the streets, offering to acquire the entire company for $5.25 per share, a premium of just 8.2% to Tuesday's closing price.
Shares of Heelys traded up to $5.35 after-hours, indicating that investors anticipate that Skechers -- or someone else -- may come through with a more compelling offer.
From a corporate governance and transparency perspective, I think it's disappointing that Heelys didn't disclose the original offer to its shareholders. But given the state of the economy, and its beaten down share price, Heelys can probably make a strong case for staying the course as a stand-alone company, at least for now. If Skechers really wants Heelys, it will up the offer -- the company has to realize that a premium of 8.2% is just not very compelling.
Given the interest in Heelys, you also have to wonder whether fellow fallen angel of footwear fads Crocs (NASDAQ: CROX) could also end up in play soon.
Nordstrom (NYSE: JWN) is expected to report Q2 EPS today after the market close. JWN August 30 straddle is priced at $2.90, September 30 is at $4.40. JWN September option implied volatility of 58 is above its 26-week average of 52 according to Track Data, suggesting larger price movement.
Red Robin Gourmet (NASDAQ: RRGB) is scheduled to report Q2 EPS today. RRGB August 30 straddle is priced at $2.60, September is at $5.15. RRGB September option implied volatility of 64 is above its 26-week average of 52 according to Track Data, suggesting larger price movement.
Heelys (NASDAQ: HLYS) is recently up 68 cents to $5.55 in pre-open trading. Skechers (NYSE: SKX) made an acquisition proposal to acquire HLYS for $5.25 per share ($142 million) in cash. HLYS, wheel-in-the-heel footwear marketer, closed at closed at $4.87. HLYS traded at a record high of $40.09 in February 2007. HLYS over all option implied volatility of 77 is near its 26-week average according to Track Data, suggesting non-directional price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
"Skechers USA (NYSE: SKX), a trendy California-based retailer, is a new buy recommendation on our 'hot list'," says John Reese, who selects stocks based on the criteria used by several legendary stock pickers.
In his always-fascinating Validea newsletter, the advisor explains, "Skechers gets approval from two of my guru-based strategies, those that I base on the writings of Peter Lynch and Kenneth Fisher." Here is his review.
"My Lynch-based model considers the firm to be a 'fast-grower' because of its 23.08% long-term growth rate (based on the average of the three- and five-year earnings per share figures).
"Lynch was perhaps best known for using the P/E/Growth ratio, which divides a stock's price/earnings ratio by its growth rate to identify growth stocks that are still selling at a good price.
"P/E/Gs below 1.0 are acceptable to my Lynch-based model, with those under 0.5 the best case. With a P/E of 10.99 and that 23.08 percent growth rate, Skechers has a P/E/G of 0.48, passing this critical Lynch-based test with flying colors.
The choppy/consolidating (or perhaps worse) market conditions sometimes give the impression that growth plays do not exist, but that is not the case, and one growth company worth reviewing is Skechers.
Skechers USA Inc. (NYSE: SKX) designs and markets contemporary footwear for men, women and children under seven individual brands, including the Skechers, Michelle K, and Somethin' Else names.
In general, analysts expect adequate same store sales gains in FY 2008 for Skechers' 150 company-owned stores, and via department store distribution. Analysts also expect new product introductions to proceed cautiously, as the footwear sector braces for continued discretionary spending reductions by U.S. consumers, due to the sluggish U.S. economy.
MOST NOTEWORTHY: GlobalSantaFe Corp, Transocean, Frontier Oil, Tesoro and Audio Codes were today's noteworthy upgrades:
JP Morgan upgraded shares of GlobalSantaFe Corporation (NYSE: GSF) and Transocean Inc (NYSE: RIG) to Neutral from Underweight based on valuation and improving deepwater rig fundamentals.
Frontier Oil Corporation (NYSE: FTO) was upgraded at Banc of America to Buy from Neutral as they believe the company's assets are ideally located to access cheap Canadian oil sands production. They feel the stock should trade closer to its replacement value, which they estimate at $55/share.
The firm also raised Tesora Corporation (NYSE: TSO) to Buy from Neutral, as the firm believes Terero is the best play on the extended refining cycle given its exposure to California.
CIBC upgraded shares of AudioCodes (NASDAQ: AUDC) to Sector Outperformer from Sector Performer on valuation after their checks suggested the company's business is stabilizing and cost cutting is tracking ahead of plan, which could bring upside EPS estimates.
OTHER UPGRADES:
GSI Commerce (NASDAQ: GSIC) was upgraded to Buy from Hold at Jefferies.
In a volatile market, investors need to keep one thing in mind: valuation. As the term volatile implies, stocks easily move up and down in this type of market. As a result, if you plan on holding a stock for the long run and don't firmly believe in the future of your stocks, you stand to be incredibly stressed and nervous at almost all times.
On this note, I'd like to introduce a company that I consider to be a very interesting long-term play for this market -- Steven Madden (NASDAQ: SHOO), a purveyor of middle-to-upper level shoes. While there are certainly issues with the company -- namely the fact that the company's founder is a convicted felon who served several years in prison (and got paid during this time) -- I think the turnaround in the stock is very interesting for a variety of reasons, most importantly the stock's cheap valuation and recently announced increase in its share buyback.
Steven Madden sells a wide variety of shoes, encompassing products you might find at a discount retailer like Marshall's to shoes that could be found at a high-end retailer like Bloomingdales, implying that the company has a highly diverse pool of potential buyers. As a result, if any one class of consumer is hit, the company wouldn't suffer completely because it also caters to others. With the company in the process of designing a new line of dresses and growing in hot markets like New York and Las Vegas, I think there's certainly potential for operating momentum going into next year.
Shares of Skechers (NASDAQ: SKX) are down more than 20% today after the California shoe company reported earnings of 32 cents per share, compared with 40 cents in the prior year. On average, analysts were looking for 43 cents. Sales grew 21%, but operating expenses outpaced that growth with a 27% rise.
CFO Fred Schneider blamed the earnings shortfall on costs associated with the Cali Gear line and the roll-out of other new products and brands, but also expressed optimism about consumer acceptance of the new brands: "Our backlog, comp store sales and our July pre-line meetings with key accounts lead us to believe that our positive trend will continue. We see many opportunities in the domestic and international marketplaces to propel the SKECHERS brand and look forward to further growing our brands."
I wrote about a more interesting side to the Skechers story back in April. The company had taken the extremely unusual step of promoting its stock with television commercials. This was around the time that CEO Robert Greenberg was dumping shares like they were going out style just as L.A. Gear did back in the 1990s -- Greenberg also founded that company.
Anyone who bought Skechers stock on the advice of the company's TV commercials that I saw during a Red Sox game can't be too happy right now. Given that there was no disclosure in the ad that Greenberg was selling shares or that investment in stocks involves risk, I question the ethics of the AD; I've spoken with a securities law expert who went so far as to question the legality of the ad.
In the meantime, I would stay away from Skechers, in part because of its seemingly slimy management.
MOST NOTEWORTHY: Countrywide Financial (CFC), Hoku Scientific (HOKU), Lam Research (LRCX), Weight Watchers (WTW) and NutriSystem (NTRI) were today's more noteworthy downgrades:
Friedman Billings downgraded Countrywide Financial (NYSE: CFC) to Underperform from Market Perform until credit stabilizes.
Piper Jaffray downgraded Hoku Scientific (NASDAQ: HOKU) to Underperform from Outperform and sees several near-term risks, including competitive threats from larger and well-financed polysilicon start ups as well as financing risk.
ThinkEquity downgraded Lam Research (NASDAQ: LRCX) to Source of Funds from Accumulate, expecting a recovery in the foundry segment but at 90nm, the nodes where Lam's market share is not high.
Lehman downgraded Weight Watchers (NYSE: WTW) to Underweight from Equal Weight and NutriSystem (NASDAQ: NTRI) to Equal Weight from Overweight...
OTHER DOWNGRADES:
First Albany downgraded Sketchers USA (NYSE: SKX) to Neutral from Buy.
During the Red Sox game Saturday, Skechers U.S.A Inc. (NYSE: SKX) ran an ad (several times) that began with a shot of the sneakers of several men sitting at a table. One of the men says something to the effect of, "I love the shoes so I figured why not buy the stock?" Then, the symbol for Skechers appears on the screen.
What is the point of this ad? Warren Buffett, one of the world's greatest executives, talks about the importance of focusing on the operations of a business rather than the stock price. And yet, Skechers appears to be promoting their stock through an advertisement that has almost nothing to do with selling sneakers.
But hey, maybe this is a bullish sign. To advertise their stock that prominently during a a baseball game, the management must have a lot of faith in it, right?
Well no. If you take a look at the recent insider trading, you can see there is perhaps an argument for why management might be focusing now on the stock price:
The Wall Street Journal (subscription required) reported that Kraft Foods Inc (NYSE: KFT), looking to make foreign acquisitions, is giving its international managers more power to engineer deals. Kraft is most interested in acquisitions in Russia, Ukraine, Brazil and Mexico, according to a person familiar with the matter.
According to Barron's Online's (subscription required) "Weekday Trader" column, Corn Products International Inc's (NYSE: CPO) recent 17% drop could be a buying opportunity.
According to the Financial Times (subscription required), Bertelsmann has joined forces with private equity partners to consider a bid for textbook publisher Thomson Corporation (NYSE: TOC). The asking price is about $5B.
OTHER PAPERS:
Several private equity firms, including Kohlberg Kravis Roberts, Bain Capital and Texas Pacific Group, have shown a strong interest in acquiring the beverage arm of Cadbury Schweppes ADS (NYSE: CSG) reported the U.K. Times.
The New York Post reported that WPP Group plc ADS (NASDAQ: WPPGY) has Hollywood ambitions, taking a 6.8% stake in Media Rights Capital, partly owned by talent agency Endeavor.
Investor's Business Daily's "New America" column mentioned shoe maker Sketchers USA Inc (NYSE: SKX) positively, noting that the company's presence has increased significantly in stores like Foot Locker Inc (NYSE: FL) and Finish Line Inc (NASDAQ: FINL).
Skechers USA (NYSE:SKX) designs, develops and distributes trendy footwear for men, women, and children. Oxfords, boots, sneakers, sandals and semi-dressy shoes are offered under the Skechers USA, Skechers Sport, Skechers Active and Somethin' Else from Skechers brands.
The firm surprised the Street last week, when it guided Q4 EPS to 28-31 cents (27 cent consensus), Q4 revenues to $295-$300 million ($262.31M consensus), Y06 EPS to $1.55-$1.58 ($1.51 consensus) and Y06 revenues to $1.196-$1.201 billion ($1.163B consensus). Management cited a 29 percent year-end increase in backlog, continued high single-digit comp store sales and strong retail sell-throughs for the optimistic view. The price popped on the news and then began formation of a bullish "flag" pattern. Stocks frequently exit a flag with a move in the same direction they were traveling when they entered it. In this case, that would be to the upside.
Brokers recommend the shares with three "buys" and two "holds". Analysts see a 21 percent growth rate, through the next year. The stock's Price to Sales ratio (1.31), Price to Book ratio (3.45), Sales Growth rate (21.36%) and EPS Growth rate (53.33%) compare favorably with industry, sector and S&P 500 averages.
The stock is one of those used to calculate the S&P 600 SmallCap Index. Institutional investors hold about 57 percent of the outstanding shares. Over the past 52 weeks, SKX has traded between $16.50 and $35.83. A stop-loss of $30.70 looks good here. Note that the firm is expected to report Q4 results in mid-February.
Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.
Heelys (NASDAQ: HLYS) has looked interesting to me for the past few months. Sure, it's a fad product that's way past its prime but look at the balance sheet: the stock is trading very close to its book value and has $96 million in cash on the balance sheet, compared with a market cap of just over $130 million. The company also has no debt.
Nordstrom
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In a volatile market, investors need to keep one thing in mind: valuation. As the term volatile implies, stocks easily move up and down in this type of market. As a result, if you plan on holding a stock for the long run and don't firmly believe in the future of your stocks, you stand to be incredibly stressed and nervous at almost all times.
Shares of 
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to $295-$300 million ($262.31M consensus), Y06 EPS to $1.55-$1.58 ($1.51 consensus) and Y06 revenues to $1.196-$1.201 billion ($1.163B consensus). Management cited a 29 percent year-end increase in backlog, continued high single-digit comp store sales and strong retail sell-throughs for the optimistic view. The price popped on the news and then began formation of a bullish "flag" pattern. Stocks frequently exit a flag with a move in the same direction they were traveling when they entered it. In this case, that would be to the upside.
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