Crocs (CROX) designs, and manufactures casual lifestyle footwear and accessories for men, women, and children. In October, I shared my thoughts on Crocs, explaining why the days of struggling to produce any shareholder value were over and why the suitable catalysts were in place for its ongoing growth momentum to be sustained.
Since then, Crocs has reported a stellar quarter, while the stock has continued to climb higher almost by the day. In my view, despite the stock’s never-ending rally, Crocs’ investment case continues to remain attractive. Mr. Market is still pricing shares cheaply relative to the company’s underlying growth, margin expansion, and ongoing share repurchase volumes.
For this reason, I remain confident that there are more gains to be made as long as Crocs continues to trade at such low valuation levels. Hence, I remain bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Q3: Another Stellar Quarter
Crocs strong sales growth momentum has shown no signs of slowing down, and the company’s most recent Q3 results once again proved that. Crocs generated revenues of $625.9 million during the quarter, 73.0% higher year-over-year. Growth was solid across all regions. Specifically, sales in the Americas were up 94.5%, the Asia Pacific was up 21.2%, and Europe, the Middle East, and Africa (emerging markets) grew 42.8% on a constant currency basis versus the prior year.
The company continues to take advantage of its brand, which has gained a luxury/fashion status lately, to charge premium prices in its limited-edition shoes while expanding its production capacity, leading in juicer margins as we advance.
In fact, Crocs’ gross margins reached a new all-time in Q3, surpassing the 60% threshold to touch 63.87%. Without a doubt, even industry behemoths such as Nike’s (NKE) and Adidas’ (ADDYY) would be envious of these margins.
The Stock Is Still Cheap
One unfamiliar with Crocs could assume that shares must have been going through some sort of bubble phase as the stock keeps breaching into new highs non-stop. However, this is hardly the case. Not only has the ongoing rally been driven by actual earnings, but the stock is, in fact, still very cheap.
For Fiscal Year 2021, the company now expects revenue growth to land between 62%-65%, suggesting a new all-time annual revenue high of $2.27 billion. Based on the company’s EPS of $8.96 over the first nine months of the year, even if Q4’s EPS comes out equal to analysts’ rather conservative consensus estimate of $1.39, Crocs will end the year with an EPS of around $10.35. This implies a forward P/E ratio of approximately 17.5x.
Why is this valuation multiple still dead-cheap? Two reasons. Firstly, the company expects revenues in Fiscal Year 2022 to be at least 20% higher year-over-year, suggesting that there are no signs of Crocs’ growth slowing down.
Secondly, management expects to have approximately $1.0 billion of share repurchase authorization remaining for future buybacks, which is utterly impressive considering the stock’s market cap is just around $10.5 billion. For this reason, EPS is set to grow considerably moving forward, and hence the stock remains incredibly cheap at its current valuation multiple, in my opinion.
Wall Street’s Take
Turning to Wall Street, Crocs has a Moderate Buy consensus rating, based on five Buys and two Holds assigned in the past three months. At $190.14, the average Crocs price target implies 5.4% upside potential, with analysts remaining quite conservative nonetheless.
Disclosure: On the date of publication, Nikolaos Sismanis had a beneficial long position in the shares of Crocs Inc. through stock ownership.
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