Crocs Appears Highly Priced
- Blackstone's 2014 investment into the preferred stock of the company has been cashed out at $26 per share.
- By the books, CROX is doing well.
- Effectively, their maximum possible dividend per year at this earnings run rate makes for a lukewarm 5.55% yield.
- The stock is temporarily overpriced.
- Retail outlets and clothing manufacturers have enjoyed a great couple of years and some names such as CROX have run ahead of themselves. Avoid this at $27 per share.
Crocs, Inc. (NASDAQ:CROX) recently bought back 50% of their $200M worth convertible preferred stock held by Blackstone for $183M and $15M was paid on top. The remainder of Blackstone's convertible preferred position was turned to 6.9M shares of common stock. Most likely, Blackstone will be a net seller of CROX stock after the expiration of a nine months no-sell agreement, as the company offers no dividend to entice Blackstone to hold onto the shares.
Today, CROX is priced high relative to investment grade and junk bonds, let alone other stocks in the markets. I rate this stock avoid over $18.
There's no way to justify the price by growth or business moat. Earnings per share for the trailing twelve months ring in at $0.16 per share which does not adequately justify a price per share of $27.68.
Earnings on a cash flow basis are much better as the business reports $100M of cash incomes over the trailing twelve months compared to their $1.85B market cap. Despite the superior cash income rate, the business remains highly priced at 18 times cash flows. The cash yield on operations implies a maximum possible dividend of 5.55% at today's market value for the business.
The company's bottom line will be favorably impacted by the relief from Blackstone's $200M preferred stock position which was paying dividends at a rate of 6% annually, so all other earnings impacts stable, we might see the business bring cash from operations up from the trailing twelve months' $103M to $115M. This improves the maximum theoretical dividend yield this company is able to pay on an annual basis to 6%.
What is the difference between theory and practice in this case? Simply, the typical vagaries of retail business which does not always improve volumes and profit margins. There are competitors who can also mold plastic shoes and take a chunk of sales from CROX, then there is the fickleness of fadware like plastic clogs which are useless in any working environment, giving them no backstop on sales or market niche.
Centrally, at 176 times price to earnings, the business is wildly overpriced. The projected 12% improvement in operating cash flow, thanks to the relief from the preferred dividend, is a solid bump for the company which remains overpriced at 18 times forward free cash flow. The company's stock becomes interesting around $10 per share, trading nearer or under 10 years' worth forward cash flow. While there are a few giant names in footwear such as Nike (NKE), there is no guarantee CROX will be the next $50B footwear giant. The more prudent thing is to look at these weak and zero moat, brand strength-only businesses when they're in the bargain bin.
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