The Zacks Analyst Blog Highlights: Caterpillar, Skechers, Iconix Brand Group, Francesca's Holdings and Deckers Outdoor

May 21, 2013, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, May 21, 2013 /PRNewswire/ -- announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Caterpillar Inc. (NYSE: CAT), Skechers U.S.A., Inc. (NYSE: SKX), Iconix Brand Group, Inc. (Nasdaq: ICON), Francesca's Holdings Corporation (Nasdaq: FRAN) and Deckers Outdoor Corporation (Nasdaq: DECK).


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Here are highlights from Monday's Analyst Blog:

Caterpillar Resolves ERA Issues

Caterpillar Inc. (NYSE: CAT) announced the resolution of its outstanding issues with Mining Machinery Limited regarding Caterpillar's acquisition of ERA, including its wholly-owned subsidiary Zhengzhou Siwei Mechanical & Electrical Manufacturing Co., Ltd. (or Siwei). This brings Caterpillar's embarrassing chapter to a close, which had so far overshadowed the company's benefits from the acquisition.

Caterpillar still owed $164.5 million for the acquisition of ERA. As part of the agreement between Caterpillar and former directors of ERA and two other interested parties, Caterpillar's total obligations have been slashed by $135 million to $29.5 million. In exchange, Caterpillar has agreed to end any litigation targeting ERA's former directors or auditors related to the alleged accounting misconduct.

In a bid to strengthen its presence in the Chinese mining industry, Caterpillar had announced its intention to acquire ERA in Nov 2011. ERA primarily engaged in the design, manufacture and supporting underground coal mining equipment in China through its wholly owned subsidiary, Siwei.

Siwei possesses a manufacturing base of 600,000 square meters in Zhengzhou, Henan province, where it manufactures and sells roof support equipment to underground mining customers in China. In June 2012, Caterpillar closed the deal after receiving a go-ahead from the Ministry of Commerce of the People's Republic of China (MOFCOM).

However, in Jan 2013, Caterpillar announced that it unearthed accounting misconduct at ERA as well as its subsidiary Siwei The issue first came to the fore when discrepancies were identified between the inventory recorded in Sewer's accounting records and the actual physical inventory.

An investigation revealed that inappropriate accounting practices had been carried out for a number of years prior to Caterpillar's acquisition of Siwei. This included improper cost allocation that resulted in overstated profit and also improper revenue recognition practices involving early and, at times unsupported, revenue recognition. As a result Caterpillar has removed the erring senior managers and a new leadership team has been put in place. In this regard, Caterpillar had incurred a goodwill impairment charge of approximately $580 million (87 cents per share) in its fourth quarter 2012 results.

Skechers Downgraded to Neutral

We have downgraded our recommendation on Skechers U.S.A., Inc. (NYSE: SKX) to Neutral with a price target of $22.00. This designer, developer and distributor of footwear for men, women and children in the United States and overseas currently holds a Zacks Rank #4 (Sell).

Why the Downgrade?

The lower-than-expected first-quarter 2013 results compelled us to revise our recommendation. Skechers posted quarterly earnings of 13 cents a share that missed the Zacks' expectations of 18 cents. Management cited that foreign currency translation loss of $3 million and a credit of $2.5 million to an account that bought a major part of excess toning inventory way back in 2011 hurt the earnings by 8 cents a share.

However, the top line showcased strength. Total net sales surged 28.6% to $451.6 million, reflecting increased demand of products and healthy performance across all revenue channels. Moreover, total revenue outpaced the Zacks Consensus Estimate of $442 million.

With more emphasis on the new line of products, cost containment efforts, inventory management and global distribution platform, the company anticipates sustaining the growth momentum in 2013. The domestic wholesale business marked an elevation of 44%, international business soared 20.7%, retail business sales grew 16.9% and e-Commerce sales rose 24%.

However, Skechers hinted that due to early Easter on Mar 31 this year and back-to-school deliveries going into the third quarter of 2013, second-quarter performance would be soft. Management also projects international business to remain even in the second quarter due to early Easter and booking trends. We observed that the Zacks Consensus Estimate for 2013 dipped by 2 cents to 97 cents in the last 7 days.

Given the pros and cons embedded in the stock we prefer to be on the sidelines at this juncture.

Stocks that Warrant Look

There are certain other stocks in the consumer discretionary sector that warrant a look. These include Zacks Rank #1 (Strong Buy) Iconix Brand Group, Inc. (Nasdaq: ICON) as well as Francesca's Holdings Corporation (Nasdaq: FRAN) and Deckers Outdoor Corporation (Nasdaq: DECK) with a Zacks Rank #2 (Buy). These stocks are expected to continue with their upbeat performances.

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