Value investing is a simple concept that involves seeking out companies you believe are selling for less than their fair value. Popularized by famed investor Warren Buffett, this strategy requires patience, discipline, and a willingness to sometimes sacrifice fast growth in favor of finding a good bargain.
In the case of Crocs (CROX -1.74%), the burgeoning footwear brand, investors don't have to give up on quality in order to find value. The stock has returned almost 1,000% over the past five years but is still too cheap to ignore.
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Crocs posted a record 2021
While Crocs trades at a ridiculously cheap valuation right now, which I'll discuss below, the quality of the business deserves a lot of attention. Record revenue of $2.3 billion in 2021 was 67% higher than the prior year. And diluted earnings per share soared 150% year over year.
These results aren't a one-time occurrence, either. From 2018 through 2021, Crocs more than doubled sales. At the same time, profit jumped more than 14-fold.
The business had a top-notch gross margin of 61.4% in 2021 along with an operating margin of 29.5% during the 12-month period. Outstanding profitability like this has allowed management to repurchase a whopping $1 billion of stock in 2021, a generous capital-allocation plan.
The company has been a surprise winner during the pandemic. With people spending more time at home, consumers increased their focus on affordability and comfort, both categories that Crocs excels in delivering. However, even as workers return to offices and people's lives start getting back to normal, Crocs' business isn't slowing down. This bodes well for the future
In fact, on the Q4 earnings call, management reiterated Crocs' long-term outlook. Annual sales in 2026 of $6 billion, which includes the acquisition of casual-footwear brand HeyDude, as well as yearly free cash flow (FCF) of at least $1 billion, are jaw-dropping financial targets that really stand out. Based on these metrics, the company currently sells for less than one times 2026 revenue and roughly four times 2026 free cash flow. That's absolutely bonkers.
Like many Western consumer brands, Crocs will rely heavily on Asia -- and particularly China, the world's second biggest footwear market -- to spur growth in the years ahead. And boosting sales of sandals fourfold by 2026 will be a primary objective.
Furthermore, continuing to utilize a marketing strategy centered on high-visibility collaborations and partnerships -- like the ones with Justin Bieber, Bad Bunny, or Balenciaga -- as well as a targeted digital-ad campaign, will definitely keep the Crocs' brand on consumers' minds.
Crocs' shares are a bargain
For a business that's firing on all cylinders today, you'd assume that the stock trades for a steep multiple. This couldn't be further from the truth. On a price-to-earnings basis, Crocs sells at a discount to competitors Nike, Under Armour, Skechers, and Deckers Outdoor.
The major sell-off in recent months that has hammered expensive growth stocks has also negatively impacted Crocs. Shares are down an incredible 60% since mid-November. This clearly makes no sense given the remarkable fourth quarter that Crocs recently reported. Revenue and operating income were up 43% and 148%, respectively, in Q4, compared to the prior-year period.
What's more, at Crocs' all-time high price of $180.57 on Nov. 12, the stock still only traded at a price-to-earnings ratio of 16. An already cheap stock has gotten cheaper.
For such a fast-growing business with a strong and relevant brand that possesses outstanding financials, Crocs' shares look like a huge bargain today. Value-conscious investors should take advantage of this rare buying opportunity.
