The Crux of Crocs' Valuation

Can someone please help me justify why any investor would be buying Crocs, Inc. (CROX) at these price levels?

Some Financial Facts:

- Price to Sales multiples of 9.4x on 2006 sales and 4.7x on 2007 sales
- Price to Earnings multiples of 51.6x on 2006 income and 25.8x on 2007 income
- Cumulative Net Income from 2003-2006 equal to $78.3 million; resulting in a cumulative Free Cash Flow from 2003 to 2006 to $(2.6) million..putting a significant amount of faith in the management with the re-investment.

After completing my initial analysis on this stock, I am hesitant to issue a "Sell" rating because of the following:

#1. Significant amount of shorts that may cause a short squeeze
#2. A Consistent "Buy" recommendation from Jim Cramer and his following
#3. A recent stock split (historically stock splits have provided favorable returns to equity owners one year post split)....

Therefore, I am putting this as a "Hold" waiting for the first sign to short sell, specifically missing the Q2 sales estimate...

With a market cap of $3.3 Billion, CROX has experienced a recent decline in there share price since the stock split on June 15th.

Figure 1. Stock Performance

Don't get me wrong, CROX deserves some credit with the growth rates that the company has achieved to date. I just don't think there is enough gas in the tank to meet future analyst growth targets. Here is a chart showing Sales and Income growth rates by quarter.

Figure 2. Sales and Income Growth Rates

With the above initial valuation metrics that I have provided, I also completed a discounted cash flow model on the stock to see what it would take to justify today's $3.32 Billion price tag.

Summary or Assumptions to Justify Valuation:

- Forecast Time Period: 2007 - 2013 (7 years)
- Using the Analyst sales forecast to 2008, then growing sales at the following rates: 2009 @ 25% declining to 5% in 2013
- Net Income Margin of 18%, consistent with analysts
- Free Cash Flow % to Net Income of 25% in 2007 growing to 110% in 2013
- WACC of 12% and a Terminal Rate of 5%

Significant Risks:

- Annual sales growth profile from 2007-2013 in the face of competition and keeping the brand fresh
- Risk of CROX net income margin erosion due to new licensing agreements for Warner Bros. and Looney Tunes characters
- 5% Terminal Rate staring in 2014

Figure 3. CROX DCF model

Disclosure: Author does not own or is short CROX at the time of publication.

Comments

[bleonard:]

I agree with your analysis. There is no way that Crocs can grow enough to justify the valuation. I believe that this year will be peak earnings. I believe that Crocs will warn sometime in the next 6 months. They are already sold everywhere in the US, Big Box, mom & pops, Hallmark stores, grocery, marinas, etc. Knock offs are coming out in droves at a fraction of the price, can already buy on EBAY for below retail price. This is a fad that will fade.

2007 Jul 05 09:51 AM

[pingish:]

The Crocs store in Shanghai is selling gangbusters. The house was packed. With repatriation at weaker dollar levels, we're talking monster revenues to boot.

2007 Jul 07 05:40 PM

[borisb:]

How do you know there isnt much gas in the tank? do you even know how many pairs of shoes they are selling? try 45 million-ish this year and 58 million -ish next year is estimate on street. did you know that penetration in ICELAND & ISRAEL is nrarly 20%?

2007 Jul 05 10:22 AM