Crocs: Better Late than Never

Sep. 5.07 | About: Crocs, Inc. (CROX)

I'll admit it. I've totally missed out on this stock. Oh, I've heard about it daily since IPO but was always on the bandwagon of 'fad!'. I see them everywhere. I see knock offs at CVS for $2, so I wonder how it can have any pricing power, and how long before they become un-cool. While I got the Under Armour (NYSE:UA) play from day one and have been on board there, Crocs never crossed my radar as a serious 'investment'.

Well, I've changed my mind due to a great early August article in RealMoney.com by Kristin Bentz (subscription required). Now generally it takes a lot more than an article to change my mind, but this was a comprehensive look at why the Crocs (NASDAQ:CROX) story is real, expanding, and will be long-lived. Since it’s a subscription service, I can't reprint anything, but I encourage any RealMoney subscribers to read it. Especially Crocs haters (like I used to be).

Now in full disclosure, I have no relationship with RealMoney other than I have been a subscriber for a long time, I don't really know how long, but the year started with 19** something, not 20** something. I was an avid reader back when JDS Uniphase (JDSU) was a stock every good housewife and taxi driver had in their portfolio (pull up a 10 year chart on JDSU to see what I mean). For real time stories, analysis, and convergence of opinions from so many different good people, RealMoney can't be beat. Second disclosure is, they have a daily blogroll written by James Altucher, which I've been lucky enough to be featured on already. (Hi James) Third disclosure, is I really like to poke fun at Cramer.

In today's blog roll I noticed the author Kristin Bentz has her own website, Talented Blonde, where she has some smaller, less detailed articles about Crocs.

Now with that said, back to Crocs itself. I've mentioned quite a few times already I am bearish on the domestic consumer, but Crocs is:

  • a cheap enough product that it should be ok even in a downturn in the economy
  • licensing itself like mad; heck I could get University of Michigan brand crocs if I wanted - and if there is one thing Americans are great for, it's paying XX% extra so they can buy the same product with an affiliation brand slapped on it - I believe that is MBNA's entire business model!
  • International sales are already at 50% of revenue and growing by leaps and bounds.
  • Growth of a Crocs in 'wear to work' area - apparently this footwear is so comfortable, nurses, restaurant workers, et al.
  • So I've changed my mind. The growth opportunities still seem huge, although the shoes just look plain silly to me. But money doesn't look silly to me, so I will ignore the fashion.

    I don't feel so bad about missing this stock thus far, because analysts have been very wrong on the growth potential as well. Just 60 days ago the consensus was EPS for 2007 of $1.55 and 2008 of $1.97. Now it is $1.96 and $2.53, respectively - an increase of 26% and 28% respectively.

    At $59, this gives forward PE of 30 (2007) and 23 (2008). Now I don't purport to know what a good valuation is for this company, since I am not sure what exactly to compare it to. But its growth rate in the recent past is certainly well in excess of 50%, and I'd argue the near future could continue to see 30-40% growth.

    Let's compare it to Under Armour for example - Under Armour is actually a smaller company than Crocs by revenue (surprised me too), with very similar growth rates on the top line. At $65, it's valued at 65x 2007 estimates and 50x 2008 estimates. Very expensive. Hence I have been out of the name for a while. But shorts constantly get burnt in it, so I wouldn't bet against it either due to that huge short position.

    Now why the difference in valuation between the two? Probably because most people are thinking like me before I read Kristin's article - we all like Under Armour because we can see a clear path to a Nike (NYSE:NKE) / Adidas type company in a decade. With Crocs we see fad and no long term growth over say 3 years. But based on the drivers mentioned above and in the article, I have to say this could be the wrong thesis.

    If they are correct and if Crocs sputters out in 8-10 years, doesn't that mean we still have a good 5 years ahead of us before the market starts to discount the slowing growth? I don't know the exact timeline of this slowdown in growth, but it does not appear imminent. And this is where I will throw in the tried and true financial blog rhetoric of "just imagine 1.3 billion Chinese in Crocs footwear!"

    Now I have been waiting for some pullback in the shares the past 2 weeks, but Crocs has remained range bound in the $56-$60 area. Only on the waterfall panic selling of mid August did we see a spike down to the 50 day moving average (at the time $49) and for a few short hours it dropped to the mid $40s. With my general distrust of the long side of the market right now I don't want to overcommit capital, but I definitely want to build up my smallish Crocs position here in the near/mid term as a multi-year play.

    Disclosure: Long Crocs, Under Armour in fund; no personal positions