Crocs, Inc (CROX) designs, manufactures and distributes eponymous resin-based footwear. Love them or hate them, the fact that you know the Crocs brand and likely have a (strong) opinion about them suggests that the company has successfully positioned itself in the popular imagination, and done so in a relatively short time frame (the company only began marketing in the US in 2002).
The company has been on quite a rollercoaster over the last few years, when its rapid ascent into the zeitgeist sent its shares up more than 450% toward the end of 2007 before collapsing 98% in 2008. Then, like a Phoenix rising out of Arizona, rebounding 2285% only to collapse 42% this week.
With volatility like this, it is worthwhile to determine what the company is actually worth. Increased volatility means an increased likelihood of creating an entry point at a compelling valuation.
So, let’s start with the latest collapse. Here’s the apparent cause: a revision of revenue and earnings guidance:
For the third quarter of 2011, the Company now expects revenue to be in the range of $273.0 to $275.0 million, an increase of approximately 27% over the $215.6 million of revenue reported in the third quarter last year. This compares to the Company’s previous guidance for third quarter 2011 revenue of $280.0 million. For the third quarter 2011, the Company now expects diluted earnings per share to be between $0.31 and $0.33 compared to its previous guidance of diluted earnings per share of $0.40.
Though a decline in EPS of up to 25% is a concern, the midpoint of this range still represents an 11% increase over the same quarter last year, which is impressive growth in this economy, right?
Well, maybe not.
Before the recent price decline, CROX was trading at a price to earnings of ~22x. For investors at that multiple, 11% growth is clearly insufficient (as evidenced by the selling pressure). But what about to an investor at its current P/E of 13x?
At the current price, EPS of $0.31 would mean TTM earnings per share of $1.23. Buying $1.23 in earnings of a still growing company for $13 (current share price net of cash) may not be the most compelling deal I’ve shown on this site, but maybe there is more to this story.
Let’s start with that cash.
click to enlarge
Here we see that the company now has the highest net cash balance in its history. This provides it with much-needed flexibility in the weak macroeconomic environment. Speaking of cash, let’s look at its ability to generate cash.
This graph illustrates one of the more interesting elements of CROX: it only really began generating free cash flow in the last three years, well after it hit its peak of $68.98 in 2007. Today the company is performing at its peak performance in terms of free cash flow generation: earning a CROIC last year of 31%, and last quarter alone of a whopping 22%. Yet the market sends its shares spiralling downward at the mere slowing of growth. In a recession.
In valuing CROX, I used assumptions that included a rapidly slowing growth rate from its historical precedent and slightly declining margins. It was pretty easy, even on conservative estimates, to arrive at a valuation in excess of the current price. From my perspective, even with the lowered growth estimates, the company would be worth more than its current price, suggesting the market has overreacted. Though the margin of safety does not appear large enough now, once the company reports its final figures on October 27th, the market may respond negatively again, pushing prices even lower and possibly creating the right entry point.