Steven Madden’s 13.9% return over the past six months has outpaced the S&P 500 by 5.7%, and its stock price has climbed to $44.69 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Steven Madden, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why do we think Steven Madden will underperform?
We’re glad investors have benefited from the price increase, but we’re cautious about Steven Madden. Here are three reasons you should be careful with SHOO, plus one stock we’d rather own.
1. Long-term revenue growth disappoints
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last five years, Steven Madden grew its sales at a 13.4% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Cash flow margin set to decline
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Over the next year, analysts predict Steven Madden’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 7.6% for the last 12 months will decrease to 5.5%.
3. New investments fail to bear fruit as ROIC declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
Over the last few years, Steven Madden’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final judgment
We cheer for all companies serving everyday consumers, but in the case of Steven Madden, we’ll be cheering from the sidelines. With its shares beating the market recently, the stock trades at 19× forward P/E (or $44.69 per share). This valuation tells us a lot of optimism is priced in - you can find more timely opportunities elsewhere. We’d recommend looking at the Amazon and PayPal of Latin America.
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