Take Advantage of This Overreaction

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When shoe maker Crocs (NASDAQ: CROX) reported second quarter earnings last week the stock got destroyed, falling 20% on the following day. While revenue grew substantially earnings came in well below analyst estimates, which the company blamed on a colder-than-normal spring season. The stock now trades for around $13.50 per share after approaching $18 earlier this year, and Barron's believes that there is significant upside going forward. I tend to agree.

Temporary issues

Crocs had a good quarter plagued by temporary issues. Revenue grew by 9.9% year-over-year with the only weak point being Japan. Wholesale revenue grew by 6.8%, driven by strong growth in the Americas and Asia Pacific regions but tempered by a steep decline in Japan. Direct retail grew by an impressive 17.6% with Europe nearly doubling, and Internet sales rose by about 1%.

Same-store sales growth was 1% worldwide, and CEO John McCarvel said in the earnings release that growth accelerated as the weather improved. Crocs has been opening new stores, with 38 added so far this year and 25 more planned before the end of the year. This builds on the current store count of 575.

Bad weather caused the company to cut prices, thus reducing profitability. But if the weakness is truly due to weather then this decline is strictly temporary. Sales of any product that is dependent on weather can be extremely volatile, and one weak quarter means nothing in the grand scheme of things.

Welcome to the bargain bin

With Crocs shares plummeting by 20% it appears to both myself and Barron's that the stock is extremely cheap. The company has quite a bit of cash on the books, with a net cash position of $282 million. This works out to about $3.20 in net cash per share, or 23% of the current market capitalization. Backing this cash out leaves an enterprise value of about $10.30 per share.

In a previous article I pegged owner earnings, which I prefer over net income and free cash flow, at $1.52 per share in 2012. Through the first six months of 2013 owner earnings are $57 million, down from $93 million in the same period last year. This is a big decline, but if the issues are truly temporary then there's no reason to believe that this kind of decline will persist. The enterprise value is just 6.8 times 2012 owner earnings, so even a steep decline leaves the valuation in bargain territory. If the stock were to trade at 12 times owner earnings plus cash the share price would be about $21.50.

The average analyst estimate for 2014 EPS is $1.26, putting the forward P/E ratio sans cash at 8.2. Earnings will be much higher if the company recovers from its issues and has a stronger second quarter next year. Barron's believes that there is at least 30% upside, but given the valuation and the strong revenue growth I think that Crocs will eventually go much higher.

There are none cheaper

In terms of shoe companies Crocs looks like the biggest bargain out there. Deckers (NASDAQ: DECK), maker of the popular UGG line of footwear, is roughly the same size in terms of revenue as Crocs but nowhere near as cheap. For one, Deckers saw revenue decrease in its second quarter, a stark contrast to Crocs' robust revenue growth. Revenue growth in 2012 was just 2.7% for Deckers as EPS fell by 32%. The company has guided for full year EPS to increase by 8% this year, which would put the value at about $3.72 per share. With no sizable net cash position Deckers trades at about 14.8 times 2013 EPS, far more expensive than Crocs. Of the two Crocs is clearly the better value.

Bigger shoe companies are no better. Behemoth Nike (NYSE: NKE), with $25 billion in annual revenue, trades at 23 times fiscal 2013 earnings, a steep price for a company its size. Analysts are expecting about 11.5% annual earnings growth going forward, but paying 23 times earnings for that level of growth is difficult. Crocs offers the prospect of faster growth at a far lower price, and although Nike certainly has competitive advantages I'd like to see the price come down before considering the stock.

Nike does pay a dividend, which neither Crocs nor Deckers does, but the yield is a paltry 1.29%.

The bottom line

After falling by 20% Crocs is trading at a bargain price. The problems facing the company are most likely temporary, as strong revenue growth and an increasing retail presence will drive the company forward. If the weather is better during the second quarter of next year I would expect analyst estimates for 2014 to be well short of the reported numbers, and the stock could very well be worth $20 per share or more. At $13.50 per share and with a large cash cushion Crocs offers a compelling value opportunity. I don't own the stock, but I'll be looking to pick up some shares in the near future if these prices persist.

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Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Crocs and Nike. 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!

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