Final August, The Worth Meter took a have a look at area of interest shoe producer Crocs Inc. (Nasdaq: CROX) and rated the stock as “Barely Undervalued.”
I used to be impressed by the corporate’s development. The shoe model had simply seen second quarter 2022 gross sales enhance 19% yr over yr.
Even higher, regardless of this development, the inventory was buying and selling at a really engaging single-digit price-to-earnings (P/E) ratio.
Since then, the inventory market has taken a liking to it as effectively.
Crocs shares have jumped from $72 to $121. That’s a 68% enhance in simply over six months!
Whereas I positively appreciated the chance in Crocs shares final August, I did have one concern…
The corporate had not too long ago spent $2.5 billion buying the quickly rising Hey Dude shoe model in February 2022.
I appreciated the acquisition however didn’t love that Crocs had taken on an enormous quantity of debt to finance it.
Previous to the acquisition, Crocs’ stability sheet was pristine. I hated to see that change.
Income for the Hey Dude model elevated by 70% in 2022 to $986 million.
Not solely is that terrific income development, however it additionally vastly exceeds the $700 million in income that Crocs’ administration anticipated Hey Dude to generate this yr.
Even higher, Crocs’ administration has gotten to work lowering the debt that was taken on for the acquisition.
Because the begin of 2022, Crocs’ long-term debt has already gone down by $500 million.
Additional, Crocs’ administration has dedicated to make use of all its free money move to proceed to cut back debt till it hits its goal debt-to-EBITDA (earnings earlier than curiosity, taxes, depreciation and amortization) ratio of 2-to-1.
So I count on we’re going to see one other $500 million in debt discount in 2023.
As soon as there, free money move use will probably be break up between extra debt discount and share repurchases. Administration’s long-term debt-to-EBITDA ratio objective is 1-to-1.
Clearly, the corporate is firing on all cylinders. However with an 68% rise in Crocs’ share value, how does the valuation look now?
Final yr, Crocs’ earnings per share got here in at $8.71.
Consensus analyst earnings estimates for this yr are $11.19, which might be a powerful 28% enhance.
With a inventory value of $121 as of this writing, Crocs is at the moment buying and selling at a P/E ratio of 11.4 instances consensus 2023 earnings.
That hardly looks like an costly value for an organization that’s rising as quick as Crocs is.
On an enterprise value-to-earnings foundation, it does look somewhat costlier however nonetheless engaging.
My concern with Crocs has all the time been that it has a faddish product. I believed that in 2010 once I purchased my then-3-year-old daughter an cute pair of Crocs.
Then I believed it once more final week once I purchased my now-16-year-old one other pair of Crocs for her birthday.
However with 13 years between purchases, it doesn’t really feel like a fad anymore.
(To not be neglected, my different daughter desires to go purchase a pair of Crocs this week too.)
Whereas Crocs isn’t as low-cost because it was final August, it nonetheless appears to be like attractively priced relative to its charge of development. Growing my conviction is administration’s continued concentrate on debt discount.
Regardless of the 68% rise in share value since I first regarded on the inventory, The Worth Meter nonetheless charges Crocs as “Barely Undervalued.”