Why Crocs May Now Be A Buy

| About: Crocs, Inc. (CROX)
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In mid October, shares of footwear retailer Crocs (NASDAQ:CROX) took a nosedive after the company cut its quarterly guidance. The stock lost 35% overnight, and has just recently bounced off of its 52 week low. When I reported on Crocs at the time of the collapse, I stated that the stock would test $15 in the near future, and now it has. But now that we've had a month to digest everything, and analysts have revised their forecasts, I'm beginning to wonder if the stock is a buy. While some competitors pages list Deckers (NASDAQ:DECK) and Nike (NYSE:NKE) as the main competitors, I'm also going to compare it to Steve Madden (NASDAQ:SHOO) and Skechers (NYSE:SKX), as they are also involved in the footwear business. So let's take a look at where things stand.

Current Price $15.52 $100.41 $32.43 $91.63 $12.01
52-week high $32.47 $118.90 $41.42 $97.68 $23.75
52-week low $14.95 $67.01 $24.83 $69.43 $11.87
Market Cap. $1.40B $3.88B $1.39B $42.49B $599M

Both Crocs and Skechers are close to their 52-week lows, while the three others are at the higher end of their yearly ranges. Obviously, four of these five names have relatively small market caps when you compare them to Nike. But let's get into some in-depth analysis on these names. We'll first look at growth potential.

Revs (2010) $790M $1.00B $635M $20.86B $2.01B
Revs (2011 est.) $1.00B $1.33B $954M $23.78B $1.66B
Revs (2012 est.) $1.16B $1.61B $1.18B $25.84B $1.62B
EPS (2010) $0.76 $4.03 $1.79 $4.39 $2.78
EPS (2011 est.) $1.22 $5.02 $2.24 $4.98 ($0.38)
EPS (2012 est.) $1.46 $5.94 $2.66 $5.76 $0.80

*Current Fiscal Year ends May 2012, so 2011 estimates are for year ending May 2012.

Even after the downward revisions over the past month from analysts (about 18 cents for this year and 20 cents for next year), Crocs still appears to have a fair amount of growth potential. The company would love to have its first billion dollar revenue year in 2011, but they might just miss it by the slimmest of margins. When comparing the company to the other names, you see that their growth is comparable to most of the names, maybe slightly below. But the key is they have growth, and will be making money this year, unlike Skechers. The question is, can they translate that growth to the bottom line? We'll look at margins next.

Gross Margin 53.69% 50.23% 39.10% 44.87% 39.32%
Operating Margin 13.85% 20.67% 16.88% 13.43% -1.68%
Net Margin 11.47% 13.59% 10.73% 10.19% -0.37%

Over the past four quarters, Crocs has the highest gross margin and the second highest net margin. That's a good sign, and these numbers have improved greatly over the past 3 years, as you can see from the following table. Just two years ago, this company was losing money, and now it's making good progress on growing their earnings. I would expect further margin improvement in 2012.

Past 3 Years 2008 2009 2010
Gross Margin 32.42% 46.61% 53.66%
Operating Margin -26.09% -7.93% 10.26%
Net Margin -25.65% -6.52% 8.58%

Now, a company can have the best margins on the planet, but if it is price too high, why would anyone want to buy it? Just because Crocs has better margins than another company, doesn't mean it's a great value, so let's look at valuations.

P/E (2011 est. EPS) 12.72 20.00 14.48 18.40 N/A
P/E (2012 est. EPS) 10.63 16.90 12.19 15.91 15.01
Price/Sales (ttm) 1.42 3.15 1.64 1.94 0.34
PEG (5-year) 0.53 1.02 1.01 1.58 N/A

Crocs actually has the lowest valuation of any of the names on three out of the four metrics. In terms of P/E multiples for both this year and next, it is significantly below the rest of the industry. It even is second best in price to sales, and I'm not totally buying Skechers low number since the company is losing money right now. In terms of price to expected growth, Crocs is tremendously cheap to the other names. Now this doesn't necessarily mean it's a buy, but you can't argue right now that it's too expensive. So far, I would say Crocs is a decent buy right now, but I've got two more pieces of evidence to help the case. The first one is the company's balance sheet.

Financials (mrq) CROX DECK SHOO NKE SKX
Current Ratio 3.11 2.87 2.22 2.94 3.66
Debt Ratio 30.39% 31.63% 31.32% 33.13% 27.51%
Working Capital $363M $489M $208M $7.28B $602M
Cash $220M $90M $35M $1.61B $248M
Short Term Debt $1.2M $45M None $280M $59M
Long Term Debt None None None $238M $79M

Crocs has a very clean balance sheet, and both its short and long term liquidity numbers look very good. Crocs has a good amount of cash (about 16% of its market cap), and has basically no debt. The cash flow numbers are also decent. I always look at a company's balance sheet before recommending them, and I don't see any red flags regarding the company here. Finally, let's take a look at what the analysts have to say.

Analyst Rating 1.7 1.8 2.0 2.0 2.4
Average Target $24.83 $122.44 $46.20 $103.67 $15.28
Upside 59.99% 21.94% 42.46% 13.14% 27.23%
Strong Buy 3 6 2 8 2
Buy 3 7 3 6 0
Hold 1 3 2 7 2
Underperform 0 0 0 0 1
Sell 0 0 0 0 0

Thanks to the selloff last month, Crocs has the most upside based on analyst's targets, and also has the best rating of the group. In fact, Crocs has more than double the average upside of the remaining four. Even if this stock only goes to $20 in the next year, you're still talking about a nearly 30% return.

After looking at all the numbers, I believe Crocs may now be a buy. I mentioned last month that I would take another look at it at $15, and that's basically where we are now. Crocs has the highest margins of these names, the lowest valuation, and one of the best balance sheets. Analysts seem to like it as well, and there seems to be plenty of potential upside. While this company isn't growing as fast as it was a couple of years ago, revenues are still expected to increase 27% this year and 16% next year. Earnings per share are expected to increase at an even faster pace. Now that the name has sold off and settled in, it was definitely worth another look. This name now appears to be one you can buy again.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.