Try Crocs' PEG Rate on for Size: You May Have to Grow Into It

Feb.18.07 | About: Crocs, Inc. (CROX)

I own Crocs (NASDAQ:CROX) stock (and some options) as I tried the shoes and they were great. My whole family loved them, and when I researched the company I found explosive growth. They have patented proprietary materials, are penetrating many professional markets and have only just begun internationally. This is combined with a great management team (previously from Flextronics) and growth into many new designs and international markets.

So with full disclosure, I offer this analysis based on the PEG Ratio.

PEG Ratio is a very reliable indicator of a good growth stock and has a pretty strong following in the investment community.

With that in mind, I reread Larsen Kusick's article "The Battle Over Crocs" , and noticed his chart which calculated the PEG ratios of CROX and its competitors.

PEG less than 1 is considered a good buy (and hence if this growth is sustainable CROX is a good buy right now). Another theory is that they should revert to the mean of the group, which, in this case, is 1.455.

So I have calculated theoretical prices by various "reversions" of the PEG. I also included his "sustainable" 5 year rates.

I then calculated what it would be if they guide 15% higher. This would be explosive as it would have an exponential effect. The P/E (the numerator) would be lower and the growth (the denominator) would be higher.

Analysts expect $2.07 for 2007; I think guidance should be around $2.3-2.5 (increase of 11% to 21%). The question is how conservative their guidance is. For that we refer to last year, when on May 4 they gave a guidance of 77-79 cents for the year. On Nov. 2, less than 6 months later, we found out actuals + 4 quarter guidance is actually TWICE that!.

My point is that nature does not behave in step functions. Last year they grew earning 200%, so this year they will come down to 100% growth. That means that eventually 2007 should be $3 earning per share.

The question is what multiple should be given to that earning.

Analysts love to take 5 years % growth at p/eg=1 (same p/e as the % growth rate).

If my assumption are correct, that earnings will be 100% up in 2007, 50% up in 2008, 30% up in 2009 , 25% in 2010 and 20% in 2011, then the 5 years average is 45%.

At p/e=45 X $3 in 2007, the stock price should be $135.

This price target is a similar conclusion to the straight calculation of 15% guidance upgrade and a reversion of the PEG to a mean of 1.

I am not suggesting that we get to over $100 next week, as I think the market forces realities would enter and there would be just too much skepticism that the growth is unsustainable. BUT the rocket should take off on Wednesday, and once the market realizes it is sustainable we could see those prices with 12 - 18 months of sustained growth, guidance and confidence in management to continue to deliver.

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Disclosure: Author is long CROX.