I posted this on Twitter this morning: Trying to explain why $crox is a $20 stock on my blog. Cant find the proper words. Hard to be a French Canadian writing an English blog post.
I recently explained my investment thesis on Crocs in this POST. I did not provide a fair value or a price target for the stock because it is too difficult to do so.
This post's intention is to comment on a set of targets for CROX using the Price/Earnings ratio (P/E) and the Price/Earnings to Growth ratio (PEG).
Since CROX has been losing money for the past two years, we use an earning power of about $1 per share for our computations (POST). On the growth rate side of the equation, we use Yahoo! Finance's 5-year expected earning growth rate of 18.66%. Take these numbers with a grain of salt. The purpose of this post is about evaluating a range of possibilities and nothing else.
Let's look at different price targets:
$0: The Washington Post was right about Crocs in July 2009. But HEY! they were wrong
$10: A very conservative P/E of 10. We are basically there
$20: A PEG ratio of about 1
$30: A more aggressive growth rate forecast based on the strong pre-booking trends persisting for a few years. As an example, U.S. wholesale fall and winter pre-bookings are trending at +70%. A high growth rate would scare short sellers away. Although possible, this scenario is highly unlikely.
Gun to my head, I pick $20 as a fair value for CROX. A P/E of 20 is very reasonable considering the growth rates that are about to be reported. What is your price target on CROX?
Crocs reported earnings last Thursday afternoon. John McCarvel, Crocs' CEO, said in a conference call, "We were off to a good start in the first quarter, where our results were dramatically better than one year ago and above guidance, highlighted by diluted earnings of $0.07 per share. Improvement began at the top with sales of $167 million, up from 24 percent from last year, and above [the] high end of our forecasted range of $155 to $160 million."
Contrary to popular belief, Crocs can make money.
Then he added the following: "Importantly, our growth this quarter was driven by strength of wholesale, which was up 26 percent in the first quarter versus last year"
Wholesale was the business dragging Crocs down for the past couple of years. It has turned around and is now a significant contributor.
Then he talked about how the pipeline of products is resonating with customers: "We are very proud to say at last check yesterday, we had 6 of the top 7 best-selling styles on Amazon.com... Fall/winter pre-bookings [are] up 82 percent from a year ago. Backlog as of March 31st was up 74 percent from last year to $204 million."
Wow, these growth rates are huge. Fall/winter is the weak season for Crocs. It seems as if merchants are enthusiastic about the fall/winter styles and that Crocs will generate better results during that season.
Given these results, we are comfortable with our earning power of $1 a share and a $20 stock price as a reasonable value for Crocs. These stellar growth rates are not sustainable, but if growth rates higher than 20 percent persist for a few years, you could see Crocs reaching $30 per share a few year from now.