Enterprise is on a roll for Crocs Inc. (Nasdaq: CROX)!
The corporate’s namesake Crocs shoe model noticed second quarter 2022 gross sales enhance 19% 12 months over 12 months.
That’s spectacular contemplating that 2021 was a stellar 12 months for the corporate.
The truth is, 2021’s annual income far and away beat any determine that Crocs had beforehand recorded, due to Crocs’ acquisition of the brand new Hey Dude model, which went on to publish explosive 96% progress within the second quarter of 2022.
However whereas Crocs’ gross sales are rising quickly, Crocs’ share value (like these of many corporations) has had a tricky go in 2022 – down half from its peak in November 2021.
All of it begs the query: Does Crocs signify worth right now?
Blowing Rivals Out of the Water
Consensus analyst estimates for Crocs’ earnings per share is $10.15 for 2022.
With a share value of $78 as of this writing, Crocs shares are buying and selling at a price-to-earnings (P/E) ratio of solely 7.7.
That ratio appears particularly low for a corporation rising the way in which Crocs has over the previous 18 months.
It isn’t usually that you could purchase rising corporations for single-digit P/E multiples.
However there’s extra to love right here…
Crocs’ namesake sneakers are made out of a single ingredient – ethylene-vinyl acetate – which retains manufacturing low cost and easy.
Consequently, Crocs has the fattest manufacturing revenue margins in your entire footwear trade, constantly blowing rivals out of the water.
These fats revenue margins are producing a terrific quantity of free money stream (which I outline as money stream from operations minus capital expenditures). It’s precisely what you need to see from a enterprise.
Final 12 months alone, the corporate introduced in additional than $500 million in free money stream.
Nevertheless, there is one concern with Crocs…
It spent $2.5 billion buying the quickly rising Hey Dude shoe model in February 2022.
I don’t thoughts the acquisition. The truth is, I fairly prefer it. It offers Crocs with some diversification, and Hey Dude is an thrilling model and match for Crocs’ enterprise.
Plus, Hey Dude has massively outperformed the expectations of $700 million in income for 2022, and Crocs is now anticipating $1 billion in income from Hey Dude this 12 months.
What bothers is me in regards to the acquisition is that Crocs funded it nearly fully by taking over debt.
In doing so, Crocs has turned its respectable steadiness sheet into one which carries extra leverage than I’m comfy with.
Administration has acknowledged that that is an unacceptable quantity of debt, and it plans to make use of free money stream to shortly pay down this acquisition-related debt.
I’ve religion that Crocs can execute this plan. However personally, I don’t like proudly owning corporations that carry plenty of debt and promote a relatively faddish product.
With something fashion-related, you’re actually rolling the cube while you leverage up your steadiness sheet.
If both the Crocs model or the Hey Dude model falls out of favor with the patron, this firm might get caught wrong-footed with far an excessive amount of debt.
There’s appreciable upside right here if the manufacturers hold performing, however the elevated danger degree retains me from getting too bullish.
Due to the leverage on the company steadiness sheet, I’m score Crocs shares as “Barely Undervalued.”
Valuation Ranking: Barely Undervalued
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Good investing,
Jody