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Six Reasons to Love Crocs (Again)
By Michael Brush
Exclusively for InvestorIdeas.com
March 13, 2008
Crocs are those ugly shoes that everyone loves to hate...or love, depending on your tastes.
I loved them back in late 2006 when the company was already a popular target of skeptics, and the stock had a sizeable short position.
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But bulls agreed with me and defied the shorts. The bulls continued to love Crocs (CROX) stock for the next 12 months -- driving it up a breath-taking 300% to trade north of $70 in a year.
Along the way, however, insiders began to hate the stock. They dumped it big time. Starting in early July 2007, they sold $60 million worth of stock for prices between $51 and $68.50 by October 3 last year, according to my tally of data at Thomson Financial.
Next, at the end of October last year, disaster struck as inventories rose and growth began to slow. So investors began hating the stock, too. By March, they sold it back down to $20 -- where I first said I liked it.
Now insiders like it again. Or at least one of them does. A director bought $5 million worth for just under $20 on March 6, according to Insider Monitor.
Is it time to hop on board this topsy-turvy stock because investors will soon start loving it again?
I think so.
Of course, given the uncertainties about the economy I would not expect a quick ride back up. However, patient investors are likely to be rewarded.
Here are six reasons why.
- The stock looks cheap. Crocs sells for just 6.4 times forward earnings, even though the company expects sales to grow 37% to $1.16 billion in 2008. Sure that’s less than the 139% sales grew last year. But it isn’t so bad! Especially for a stock that sells for just six time forward earnings. Crocs expects net income to grow 35% this year to $2.70 a share.
- Parlez-vous Crocs? The company now sells in over 90 countries, where consumers love popular Crocs brands like Beach, Cayman, Athens, and Mary Jane. International sales grew to more than half of overall revenue last year. Crocs is seeing the kind of white hot growth abroad that it saw in the U.S. earlier on in its history. Foreign sales increased 221% last quarter, while domestic sales were up 47%. Europe saw 255% growth last quarter. The company is also putting an “awful lot of money, time and effort” into infrastructure in emerging markets like China, India, Brazil, Russia, Eastern Europe and the Middle East, chief Ronald Snyder said in the last Crocs conference call. It expects those investments to start paying dividends later this year. By the end of the year, international sales could represent 60% of overall business.
- New product lines. But won’t Crocs just be a fad? That was the original knock on Crocs. But the company continues to roll out new products. They come in Croslite, a proprietary resin which softens with body heat and moulds to your feet making the shoes comfortable. And they are made of other materials like leather and canvas. It recently released a fleece-lined shoe called Mammoth which did well. It’s introducing slightly less funky designs for men -- and even a Crocs golf shoe. Now if it could only cook up some better ideas for the winter months.
- Lower air freight. Crocs had to air ship popular brands like Mammoth, Alice and Troika during the holiday season to meet higher-than-expected demand. That hit gross margins. Now it is positioning inventory better for the spring and summer, says the company, so air freight bills will come down.
- Financial strength. Crocs recently had $36 million in cash and only a little debt. But the Morgan Stanley analyst covering the stock believes that cash level could rise to $150 million in 2008.
- Smart money presence. I see that Don Hodges lists
Crocs as one of the
top holdings in his Hodges Small Cap Fund (HDPSX). Hodges’ larger fund, the Hodges Fund (HDPMX) which has a longer record, has an annualized five-year return of 28%, or 13 percentage points better than its benchmark. The fact that Hodges has such a good record, and also a large position in Crocs, is a stamp of approval, to me.
The bottom line: This is a really bad time for retail stocks in the market. Combined with the exodus of momentum investors who got bruised and battered in Crocs, you have what looks like a great valuation and a great entry point for this company which still has an enthusiastic customer base. Take advantage of it.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.
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