The Federal Reserve's intention to hike interest rates throughout 2022 to curb soaring inflation is spooking investors. And companies that are still performing extremely well have been unduly punished over the past couple months with the overall weakness in the stock market.
Crocs (CROX 0.84%), whose shares are down 52% this year and 66% off their peak, is a prime example of the disconnect between investor sentiment and business fundamentals that is happening in the market right now. And investors need to pay close attention to this incredible buying opportunity.
Here's why Crocs makes for a compelling investment right now.
Crocs' fundamentals look strong
The maker of seemingly ubiquitous foam slip-ons, Crocs was a surprising beneficiary of the coronavirus pandemic. Spending more time than ever at home, people sought out comfortable apparel and footwear options. It would be understandable to assume that this surge in demand was a one-time occurrence and that Crocs' business will revert back to slower levels of growth going forward. But so far this hasn't been the case.
In the most recent quarter (ended March 31), revenue jumped 43.5% year over year. And this was compared to a sales increase of 63.6% in Q1 2021. The momentum is clearly still strong, partly attributed to Crocs' growing brand strength. Piper Sandler's spring 2022 Taking Stock With Teens survey found that Crocs was the sixth most popular footwear brand among the Gen-Z demographic, up from eighth last year.
I'm sure many skeptical investors struggle primarily with the question of just how relevant Crocs can remain in an ultra-competitive industry. But having a powerful and growing brand, one that is bolstered by clever partnerships and collaborations with celebrities, luxury fashion houses, and other artists, while at the same time leaning into digital marketing channels, is certainly working tremendously.
Crocs' success is exemplified by its wonderful financial profile. In the latest quarter, the business posted a superb gross margin of 49.2%, which was higher than industry heavyweight Nike. Additionally, Crocs is a cash cow, producing free cash flow (FCF) of more than $500 million in 2021.
Image source: Getty Images.
Management is so confident in the company's prospects that it raised full-year guidance, expecting revenue now to grow between 52% and 55% year over year. And by 2026, the leadership team's forecast calls for total sales, including the recent acquisition of Italian casual footwear maker HeyDude, to reach $6 billion. At this scale, annual FCF generation could exceed $1 billion, or 26% of the business's entire $3.8 billion market capitalization today!
It's not difficult to realize that Crocs is a business that is firing on all cylinders right now, despite sky-high inflation and continued supply-chain challenges that are plaguing most other companies across the global economy.
Crocs sells at a steep discount
In addition to unquestionably strong fundamentals, characterized by solid growth prospects and excellent financials, Crocs' stock is ridiculously cheap. As of June 2, shares trade for a price-to-earnings (P/E) ratio of just 5.5. This compares favorably to the S&P 500's P/E of 21 and a direct rival like Skechers, which trades at a P/E multiple of 8.5.
I'm not exactly sure why Crocs sells for such a steep discount to the rest of the market. My best guess is that investors aren't comfortable with the company's long-term prospects, especially when it comes to the fashion industry. Consumers have fickle tastes, and Crocs could prove to be a fad that eventually becomes a thing of the past.
Even with a stock price that has fallen 52% in 2022, Crocs has rewarded shareholders, as the stock has climbed almost 800% over the past five years. An attractive valuation coupled with a favorable outlook means that now might be a good time to invest.
