Crocs, Inc. Looks Undervalued After Blackstone's Investment

After Christmas, shoppers are given an excellent opportunity to catch amazing sales from retailers like Macy's, which is celebrating its second year of the seven-day-long event, "Week of Wonderful". But, consumers aren't the only ones snatching up after-Christmas deals. Blackstone Group (NYSE: BX  ) made breaking news today when it announced plans to invest $198 million in Crocs (NASDAQ: CROX  ) . In response to the investment, shares of the now $1.4 billion shoe retailer rose 21.08%. Though such a large rise in share price may cause investors to ponder whether the company has additional upside or not, its fundamentals suggest that the company still has a long ways to go before reaching fair value.

Blackstone got really nice terms
In exchange for the $198 million in cash, Blackstone will receive 200,000 shares valued at $1,000 apiece. In addition to having voting rights, the shares offer a lucrative 6% dividend per annum. However, in the event that Crocs misses payments, the dividend will increase to 8% per annum until all late payments are paid in full.

On top of offering Blackstone an attractive yield, the preferred shares can be converted into common shares at a conversion price of $14.50, which means that Blackstone can receive up to 13.79 million shares of common stock. With 88.43 million shares outstanding, this implies that the company could own up to 13.49% of the company if it elects to convert its shares.

However, instead of using the company's cash for operating purposes, most of it ($180 million worth) with go toward a newly announced $350 million share repurchase. At today's closing price, the transaction would reduce share count considerably and grant Blackstone a 17.1% stake. Furthermore, Blackstone, as long as it maintains at least a 75% holding in the preferred shares, will have the right to appoint two members to the company's board of directors, increasing its ability to enhance shareholder value as it deems fit.

Crocs has had a tough time lately, but its long-term results have been dynamite!
Prior to the announcement, shares of the shoe company were trading near their 52-week low. The low price for the shares came about after the company reported a worse-than-expected quarter and forecasted that the following quarter would be less than ideal. If management is right, revenue will come in around $220 million, 2.2% lower than it saw during the same quarter last year. Likewise, earnings per share are expected to deteriorate from a loss of $0.04 in the fourth quarter last year to a loss of $0.23 this year.

Despite this downturn in business, Crocs appears to offer some upside for investors interested in buying shares now. Over the past five fiscal years, the company succeeded in growing revenue by 55.7% from $721.6 million to $1.12 billion. This growth rate is smaller than the $105.2% jump experienced by Deckers Outdoor Corporation (NYSE: DECK  ) , but larger than the 32% increase seen by Nike (NYSE: NKE  ) .

Though the company sits in the middle of these two competitors in terms of revenue growth, its bottom line has improved at a much more rapid pace. Over the past five years, the company has seen its net loss of $185.1 million turn into a net profit of $131.3 million. Meanwhile, Nike's net income has increased by 67.1% from $1.49 billion to $2.49 billion. Deckers Outdoor's net income has seen slightly better results with a 74.4% rise in profitability from $73.9 million to $128.9 million, even in light of rising raw materials costs.

Year-to-date, however, business has faltered, leading investors to wonder what the future might look like for Crocs. Looking at the company's third fiscal quarter, we can see that its revenue has risen by 2.4% to $288.5 million this year compared to the $295.6 million the company brought in during the same quarter last year. Deckers Outdoor, on the other hand, has experienced a modest 2.7% rise in revenue, while Nike blows both companies out of the water with a 7.7% increase.

The same can be true for Crocs's bottom line. As of its most recent quarter, the company's net income has fallen a steep 71.2% from $45.1 million to $13 million. Deckers Outdoor also saw a decrease in profitability, but not to the same extend. Compared to the same quarter last year, net income has fallen 23.2% from $43.1 million to $33.1 million. Unlike both Crocs and Deckers Outdoor, Nike is the only shoemaker of the bunch to see its profitability improve. Compared to the same quarter last year, the company's most recent net income figure rose 37.6% from $567 million to a mouthwatering $780 million.

Talk about beautiful assets!
Currently, the company has a very attractive balance sheet. On top of having a current ratio of 3.5 (which includes $332.5 million in cash), the company trades at only 1.9 times book value. In juxtaposition, Deckers Outdoor has a current ratio of 1.82 (with very little cash on hand) and trades at 3.87 times book value. Nike, as a large company with a nice economic moat, trades at a far higher 6.21 times book value, but has a current ratio of 3.53 to help bolster its attractiveness.

If Crocs is able to turn its operations around, which it may be able to do with such a large amount of cash on hand, the company could very well trade at the same level (or higher) that Deckers Outdoor does. This would imply a market value of $32.87, more than double the company's closing price today.

Foolish takeaway
Year-to-date, Crocs hasn't been doing too well, but its results over the past five years have been stellar. More likely than not, Blackstone believes that management (especially after the retirement of the company's CEO next April) will be able to turn business around. While this remains to be seen, the company is less than half the size of Deckers Outdoor and a mere 2% the size of Nike. This suggests that, if management can make the brand more appealing to consumers, it has plenty of potential for consuming market share. Based on how cheap the business is, any sign of a turnaround could mean significant upside for investors even from this level.

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  • Report this Comment On December 31, 2013, at 6:07 AM, Mayssa wrote:

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  • Report this Comment On January 02, 2014, at 4:51 AM, Mayssa wrote:

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