A Stock Set to Sizzle This Summer

The official arrival of summer is upon us. It's time for the beach, cooking out, and the heat. One hot stock ready to rise along with the temperatures is footwear maker Crocs (Nasdaq: CROX  ) . There are two great reasons investors should try this stock on for size.

Click-your-heels growth
Crocs went public in 2006, and the stock immediately raced upward. By the latter part of 2007, the stock had quadrupled in price. Then came a meltdown that wiped out more than $1 billion in market capitalization by early 2009. The collapse in share prices was partially due to overall economic conditions. However, another cause was that Crocs cranked up production capacity too aggressively at the same time its products were losing popularity in the marketplace in the face of competition from cheaper imitation products. Inventory got the best of Crocs, as did the much-feared "fad" status.

Management realized that the company needed to change to remain competitive. In 2008, Crocs began closing some manufacturing facilities, consolidating distribution centers, reducing headcount, and writing down inventory. With these changes and an improving world economy, Crocs has experienced strong growth in several key areas.

Source: Crocs 2011 10-K Report.

Source: Crocs 2011 10-K Report.

Last year proved to be a good one for Crocs. Revenue was up nearly 27% over 2010. Operating cash flow increased more than 36%. Best of all, earnings were up more than 63%.

Crocs is growing in some other important ways as well. The number of company-owned retail and outlet stores increased 27% to 272 in 2011, compared with 214 in 2010. This is good news, because Crocs keeps a greater percentage of the profits from sales in its own stores.

Even better news is that around two-thirds of Crocs' store growth has been in Asia. This is important to the company because of the growth prospects linked to Asia's expanding middle class. Take a look at the percentages each international region contributed toward total revenue increases in 2011. Asia leads the way for Crocs.

Source: Data compiled from Crocs 2011 Annual Report.

Source: Data compiled from Crocs 2011 Annual Report.

What about the threat to traditional retail sales from the Internet? Crocs is addressing this challenge head-on by opening new Web stores and focusing on Internet marketing. Internet sales were up by nearly 28% in 2011 and account for 9.6% of total revenue.

Another area that investors should be pleased with is that Crocs is expanding its product line to be less dependent on sales of its classic clogs. The product-line expansion includes new leather shoes as well as accessories and apparel. While the clog silhouette brand still accounts for a large part of overall revenues, the classic shoe made up 48.5% of footwear revenues in 2011 -- down from 53.7% in 2010.

Will Crocs be able to sustain its growth? There are challenges, including world economic conditions and intense competition in the footwear market. However, Crocs' expansion in Asia, its clear focus on Internet sales, new products, and a management team tested by fire all position the company well for continued growth.

Shoo-in valuation
If the company's growth prospects have you clicking your heels, you'll really love Crocs' valuation. Take a look at how it compares with several peers.


Fwd P/E


Enterprise Value/EBITDA

Crocs 9.33 0.61 7.10
Deckers Outdoor (Nasdaq: DECK  ) 8.72 0.59 5.58
Skechers USA (NYSE: SKX  ) 26.96 12.70 (11.52)
Steve Madden (Nasdaq: SHOO  ) 11.94 1.24 8.74
Wolverine Worldwide (NYSE: WWW  ) 12.75 1.29 10.18

Source: Yahoo! Finance.

In general, lower forward price-to-earnings, price-to-earnings-to-growth, and enterprise value-to-EBITDA ratios imply that shares are priced attractively. Skechers USA is the outlier in terms of valuation with a high forward P/E, a very high PEG, and a negative enterprise value/EBITDA ratio. Skechers also lost money in 2011.

Steve Madden and Wolverine Worldwide are neck-and-neck with similar valuation metrics. Wolverine experienced negative earnings growth last quarter compared with the prior year. Steve Madden had solid earnings growth, but not as high as Crocs.

The clear valuation winners are Crocs and Deckers Outdoor. However, while Crocs is growing its earnings, Deckers' earnings in the most recent quarter were down nearly 59% compared with the same quarter in the prior year. Deckers is also facing decreasing cash flow. Crocs is steadily growing its cash flow.

The average P/E values for Crocs in the comeback years of 2010 and 2011 were 15.1 and 16.8, respectively. These P/E levels seem warranted considering Crocs' solid financial performance. The forward P/E of a little over 9 indicates plenty of room to move upward just to get to these average levels.

The bottom line is that every metric available shows Crocs to be quite inexpensive right now. With solid prospects for continued growth internationally and through expansion of product lines, the stock seems likely to climb higher.

If the shoe fits
If you're a growth investor, Crocs is for you. The company has seen consistent revenue, earnings, cash flow, and equity growth over the past three years and should continue growing. Watch Crocs' equity growth. As long as this metric increases in the double digits, the stock should be a good pick.

You might be a value investor, looking for well-run companies with cheap stocks. In that case, Crocs is for you, too. The stock has a super-low PEG and a forward P/E well below its average over the past two years.

There's an old saying that if the shoe fits, wear it. Here's a new saying: If the shoe stock fits, buy it.

You might also want to learn about other stocks that will have you walking on sunshine in The Motley Fool's new free report, "3 American Companies Set to Dominate the World." Get your free copy now.

Fool contributor Keith Speights has no positions in the stocks mentioned above, but he did wear a pair of blue Crocs shoes while writing this article. Motley Fool newsletter services have recommended buying shares of Skechers. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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