Crocs Should See a 50% Gain by December
Julian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you view the stock price history of Crocs (NASDAQ: CROX), a company with a $1.3 billion market cap, you'll see the share price of the bright-colored, closed-toe clog manufacturer and the S&P 500 moving in opposite directions over the last year, according to Yahoo! Finance.
Crocs's 52-week change: -19.89%. The S&P 500's 52-week change: +15.05%.
Within those numbers lies a nearly 35% difference. Warren Buffett has said that "Mr. Market" can often be irrational, and the way the market is valuing Crocs seems to be a shining example of this.
To determine a fair value for Crocs, the inventor of the infamous "Croslite" material, it's helpful to compare it to similar-sized consumer-goods companies that are also focused on the apparel footwear sector. Two such companies include Deckers Outdoor (NASDAQ: DECK), which has a market capitalization of $1.9 billion, and Steven Madden (NASDAQ: SHOO), which checks in with a market cap of $2 billion.
Crocs is trading at a deep discount
Before we know how the clog maker stacks up against competitors, we need to look at Crocs itself. With quarterly revenue growth (year-over-year) of 10.4%, and a ROE (trailing-12-months) of approximately 23.7%, Crocs continues to see brisk sales of its clogs. Sales are largely driven by workers in the medical industries, and Crocs is capitalizing on this trend by expanding its "Rx" line of fully-molded clogs, which are now American Podiatric Medical Association (APMA)-accepted and offer improved cushioning and an ultra-soft toe box.
Despite record top-line performance and further additions to its new line-up of more traditional shoes, Crocs is posting a P/E (ttm) of just about 10.3 and its share price has declined nearly 20% over the last year.
One of Crocs' primary competitors is Deckers, the retailer of such casual footwear brands as Sanuk, Teva and UGG. In comparison, the company has a significantly higher P/E of 16.3, a lesser ROE of 16.3% and quarterly revenue growth of just 2.2%.
A blemish for the Goleta, CA company is that sales of its UGG brand slipped 1.5% year-over-year. This is cause for alarm for analysts, as UGG alone delivered 85% of Deckers' revenue results. Over the last year, the company's share price has fallen 13.29%, but regardless, Deckers still has a trailing P/E--that's 600-basis points higher than that of Crocs.
Our second comparable is Steven Madden, the hip New York City shoemaker, with a trailing P/E also in the high-teens, a comparable ROE to that of Crocs at 21.7% and similarly positive quarterly revenue growth of 12.8%.
For the full year ended Dec. 31, 2012, Steve Madden saw net sales increase 26.7% and witnessed gross margin expansion to 39% in the fourth quarter as compared to 35% for the same period last year.
Even with these positives, Crocs boasts a significantly higher gross margin than Madden at 54%. Plus, Crocs generated considerably more gross profit for the trailing-twelve-months of $608 million versus Madden's $456 million.
While shares of Crocs have been trading in the red over the last 52-weeks, Steven Madden shareholders have experienced a positive 4.9% return.
Risk and return go hand-in-glove
With better, or arguably far-better, business metrics, why is Crocs being punished as compared to its two peers? There is no single definitive answer, but shareholders who have endured steep losses have long memories.
It was not long ago (October 2007) that Crocs traded at an all-time high of $68.98 per share. It then collapsed in little more than a year to $1.04 in November 2008 as the Wall Street crisis began unfolding. A large institutional investor that watches a stock holding decline ~98% in 13 months may have some trepidation about dipping a toe back into the water.
For those who are willing to take the risk, however, there is significant return potential ahead for Crocs. If you simply apply the 16x P/E multiple (enjoyed by its two peers) to Crocs's full-year diluted earnings per share of $1.44, we reach a very rational $23 per share. This share price also represents an approximate 53% appreciation from where Crocs is trading today at just $15.06 per share.
Crocs's future is as bright as its clogs
According to Crocs CEO John McCarvel, fiscal 2013 looks extremely positive.
The strength of our backlog and our increased retail presence around the globe gives us confidence that our first half revenue growth will be approximately 13%-to-15% and our initial expectations are for slightly better growth in the second half of 2013 compared with the second half of 2012.
In contrast, Deckers Outdoor's management team is forecasting just a 7% revenue increase for fiscal 2013, and Madden also provided full-year guidance in the single digit range of 6%-to-8%.
In addition to a strong revenue outlook, Crocs is also getting ready to unveil and deliver its spring-and-summer lines, including the Huarache collection (which the company expects to join its million pair seller club), new molded boat shoes for both sexes, and a women’s wedge line. Crocs continues to innovate and is not riding a one-trick pony, which has Deckers and its UGG brand in hot water with research analysts and short-sellers.
If Crocs hits its own hurdles, expect the stock to soar
To conclude, Crocs is due to report earnings on April 25 and is expecting revenue between $305 million and $310 million and diluted earnings per share of between $0.32 and $0.34. If Crocs meets or beats its own aggressive revenue and earnings guidance, the stock should move up sharply after first quarter earnings and continue an upward trajectory into the summer and fall on the strength of its new product lines.
Don't be surprised if you see Crocs's P/E ratio begin to close the gap from 10 to 16 and move back into alignment with its peer group and the sector's historical valuation metrics. If this happens, Crocs can easily clock in at $23 per share by December, on anticipation of a strong holiday season with a full-year 2013 earnings report coming in February 2014.
Julian Willis has no position in any stocks mentioned. The Motley Fool owns shares of Crocs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!