00:00 Crocs reported earnings last month and the stock tumbled 14% taking the stock price to
00:05 just below $103 a share. At that price the company has a market cap of $6.3 billion.
00:12 Its got $200 million of cash and $2 billion of debt so the enterprise value is $8.1 billion.
00:18 Revenue over the last 12 months is $3.9 billion which is 39% higher than at the same time
00:23 last year. And that's thanks to Crocs 100% acquisition of the Hey Dude brand. The Hey
00:29 Dude brand now contributes 26% of total revenue. Net income is $669 million with $1.1 billion
00:36 of EBITDA and $750 million of free cash flow. And stock based compensation is minimal at
00:43 only $30 million. So Crocs is now valued at 8 times EBITDA, 10 times earnings and 11 times
00:49 free cash flow. Looking at recent trends you can see that
00:52 earnings has been heading in the right direction even though the stock price has seen some
00:56 wild swings. The PE ratio has fallen to under 10 which is lower than its historical average
01:02 and gross margins have held nicely above 50% which is excellent for a footwear brand. Last
01:07 quarters earnings report was also decent, total sales grew 11% to over $1 billion which
01:12 was a new record and net income margin increased to just under 20%. Sales in Asia also took
01:19 off climbing 33% year over year. So why has the stock fallen? There are perhaps
01:24 three reasons. First Crocs has over $2 billion of long term debt thanks to its acquisition
01:30 of Hey Dude and this is costing the company $170 million of interest payments a quarter.
01:36 Second total sales of Hey Dude grew only 3% which may have been lower than investors were
01:41 looking for. Third many investors are simply sceptical
01:45 of the Crocs brand. They see the shoes as a fad that could deflate at any time and that's
01:50 why the stock rarely trades at a high multiple. However Hey Dude did see solid e-commerce
01:55 growth and today the company refinanced a chunk of its debt pile reducing interest
02:00 payments by half a percent. In truth CEO Andrew Rees has done an exceptional job at Crocs
02:06 transforming the product into one of the most desirable brands around and that brand strength
02:11 can be seen in the companies pricing power. Let's assume Crocs can grow its annual revenue
02:16 by 5% a year for the next 5 years and maintain its net income margin of 20%. That would put
02:22 net income at $1 billion in 5 years time. If the P/E ratio can climb back up to 15 the
02:29 market cap would be $15 billion and that works out to an investment return of 19% per year.
02:35 That looks like a solid return and Crocs looks like a solid buy but these are my personal
02:40 opinions not financial advice and I do hold shares in the company.
02:44 For more detailed investing ideas make sure to visit our website overlookedalpha.com
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