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Investment thesis
Crocodile (NASDAQ:CROX) designs, manufactures and distributes casual shoes and accessories. I believe CROX presents an excellent investment opportunity for a growth-oriented investor because:
1. They are rapidly expanding their market share all over the world, resulting in accelerating revenue growth.
2. Their profitability is well above the industry average and operating cash flow is growing rapidly.
3. Their P/E ratio remains below the industry median despite this growth and profitability.
Rapid expansion worldwide and accelerating revenue growth
CROX is rapidly expanding its market share everywhere: Americas, Asia, Europe, etc. Based on the latest earnings call, its revenue grew 73% YoY and 100% from Q3 2019 (Americas 95% YoY, Asia Pacific 24% YoY , EMEA 44%). Their business groups come together at a perfect pace for their growth plan (new product development, marketing, celebrity endorsements, and digital sales). Recent cultural shifts in lifestyle and workplace culture, with remote work environments fueling a trend towards a more casual dress code, are contributing to CROX’s rapid growth. As shown in the trends below, there is a positive progression in revenue, margin and EPS growth trends, while the overall revenue trend shows a steep incline over the past 1-2 years.
Source: Slide from investor presentation
Exceptional profitability and growing cash flow
The profitability of CROX is exceptional. Every relevant profitability metric shows that their profitability is well above industry standards. Their EBIT margin (26.76%), EBITDA margin (28.36%) and net income margin (35.35%) are more than double that of industry medians. In addition, their gross margin and operating margin are improving. Alongside this profitability, their operating cash flow is progressing well. Cash from operations was $9.7 million in 2015, but it has now reached $469 million (a 48-fold increase in 6 years!). This growth in operating cash flow should continue at the incredible rate of 87.82% (Seeking Alpha estimate). The various measures of profitability are presented below.
Source: Alpha Research
Undervalued by the market
Even with this exceptional growth and profitability, the market values the CROX on par with its peers, based on their P/E ratio. CROX’s TTM P/E is 15.06 (industry median 15.97) and CROX’s FWD P/E is 14.55 (industry median 16.74). I think the market is pricing CROX wrongly at this point and hasn’t properly adjusted to CROX’s impressive growth rate. Even with a very conservative estimate (which will be presented in the next section), the market undervalues CROX by 20-50%. I expect the market to take notice of this mispricing and for the CROX stock price to adjust to a more appropriate level.
Estimation of intrinsic value
I used the DCF model to estimate the intrinsic value of CROX. For the estimate, I used EBITDA ($531M) as the cash flow indicator and the current WACC of 8.5% as the discount rate. For the base case, I assumed 20% EBITDA growth (10% lower than Seeking Alpha’s revenue growth estimate of 30%) for the next 5 years and zero growth thereafter (no terminal growth). For the bullish and very bullish case, I assumed 25% and 30% EBITDA growth, respectively, for the next 5 years and zero growth thereafter.
The estimate revealed that the current share price represents an upside of 20-50%. Even using the very conservative calculation (slower growth rate than Seeking Alpha’s estimate, assuming margins remain the same, etc.), this estimate shows that CROX is clearly undervalued by the market. Given their rapid growth across the globe and digital sales, and improving margins, a 20-50% upside is well justified.
| Price target | Upside down | |
| Base case | $179.22 | 20% |
| Bullish case | $214.50 | 43% |
| Very bullish case | $255.58 | 71% |
The assumptions and data used for the price target estimation are summarized below:
- WACC: 8.5%
- EBIT growth rate: 20% (base case), 25% (bullish case), 30% (very bullish case)
- Current EBIT: $531M
- Current stock price: $149.76 (10/22/2021)
- Tax rate: 30%
Risk
Clothing is a very cyclical activity by nature and sensitive to consumer trends. There are many alternatives available and the customer has a very low changeover cost. Therefore, the technical gap is very shallow, if not non-existent. However, given the unique culture CROX is building through its marketing campaign and celebrity endorsement, I believe CROX should be able to maintain its market share and continue to grow for the foreseeable future. I expect CROX to take hold in the casual shoe market like Nike or Adidas did in the sportswear market.
Continued inflationary pressure and supply chain disruption may negatively impact CROX. Rising material and labor costs can squeeze margins, and supply chain disruption has the potential to significantly suppress growth. However, based on their latest earn calls and news from CNBC, CROX has met these challenges exceptionally well. By relocating their manufacturing sites and using multiple transportation channels, they manage to stay one step ahead. I believe they will continue to do so. Further, I expect inflationary pressure and supply chain disruption to be transitory (on the order of years), relative to a long-term growth horizon for CROX.
Conclusion
I believe CROX presents an excellent investment opportunity for a growth-oriented investor. Their growth engine is running full blast and they are rapidly expanding worldwide. Additionally, the increasing shift to more remote work environments and the widespread adoption of a casual dress code will also contribute to their growth trajectory. Inflation pressure and supply chain disruption may present some risks, but they will be short-term and not expected to impact CROX’s long-term growth trajectory. I expect CROX to establish itself as a powerhouse in the casual shoe market, and I think the current stock price is up 20-50%.
