Is Crocs a Buffett Stock?

Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy Crocs (Nasdaq: CROX  ) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Crocs meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Crocs' earnings and free cash flow history:

Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Over the past five years, Crocs' earnings and free cash flow have been fairly volatile as sales fell in 2008 and 2009 before beginning to rebound in 2010.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity
(5-year average)

Crocs 1% 27% 19%
Nike (NYSE: NKE  ) 7% 22% 22%
Deckers Outdoor (Nasdaq: DECK  ) 0% 25% 23%
Under Armour (NYSE: UA  ) 7% 16% 18%

Source: Capital IQ, a division of Standard & Poor's.

Crocs tends to generate high returns on equity while employing almost no debt.

3. Management
CEO John McCarvel has been at the job since 2010. Prior to that, he held a few other jobs at the company, including COO, and worked in sales and marketing for companies including Flextronics and Micron.

4. Business
Shoes aren't particularly susceptible to wholesale technological disruption, though Buffett would approach any relatively new consumer goods trend critically.

The Foolish conclusion
Whether or not Buffett would ever purchase shares of Crocs, we've learned that the company operates in a fairly straightforward industry and generates high returns on equity with limited debt, though it doesn't particularly exhibit consistent earnings.

If you'd like to stay up-to-speed on the top news and analysis on Crocs or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Under Armour. Motley Fool newsletter services have recommended buying shares of Under Armour and Nike. Motley Fool newsletter services have recommended creating a diagonal call position in Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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