Since going public in 2006, shares of shoe company Crocs (CROX 1.47%), maker of those infamous foam clogs, have gone up 259%, beating the 198% return of the S&P 500 over that same time period. Yes, Crocs is a market beater.
However, I don't believe it's too late to invest in Crocs. In fact, the company is the latest addition to my portfolio because I believe it might be the best combination of growth and value available to buy right now. Here's why.
The monster value proposition
For the first quarter of 2022, Crocs grew revenue 44% year over year. This growth isn't a one-off. For the year, the company expects to grow its top line between 52% and 55% when compared to 2021. Some of this will come from its recent acquisition of peer Heydude. But management still expects organic growth of over 20%, which is exceptional for a shoe stock.
Crocs isn't just growing revenue at an exceptional rate; it's also highly profitable. For 2021, the company had operating-profit margins of 27.3%, which is about what it expects in 2022 and beyond.
By 2026, Crocs management expects to generate over $5 billion in annual revenue from the Crocs brand, over $1 billion in annual revenue from the Heydude brand, and annual free cash flow (FCF) of over $1 billion. This speaks to the potential of future growth and profitability.
Stocks that are growing fast and have strong profit margins typically trade at premium valuations. By contrast, Crocs stock trades at a trailing price-to-earnings (P/E) ratio of under five, compared to an average P/E ratio of 24 for the constituents of the S&P 500. This combination of top-line growth, profitability, and cheap valuation is why I recently called Crocs the biggest no-brainer on the market.
Crocs is not without risk
That said, saying Crocs is a no-brainer is hyperbole. In reality, investors always have risks to think about -- there's a bear argument for every bullish one. And indeed, Crocs is facing the following three risks that shouldn't be overlooked.
1. Shrinking discretionary spending
Gas prices are at an all-time high in the U.S., and inflation is the highest it's been in 40 years, squeezing consumers. According to Moody's Analytics senior economist Ryan Sweet, these dynamics are costing households an extra $460 per month compared to last year. And it's fair to say that most households don't have an extra $460 in monthly household income to offset inflationary pressures.
This means that many households will necessarily cut back spending somewhere. I believe they're more likely to cut spending on extravagant items than on Crocs's shoes. That said, it is possible for Crocs and other consumer discretionary stocks to see a decline in revenue as people spend more money on the bare necessities.
2. Rising input costs
Inflation doesn't just hit consumers like you and me -- businesses are also impacted by higher manufacturing costs. Crocs's management has already implemented some price increases in anticipation of rising input costs. However, we don't know if management raised prices enough. And we also don't know if it will be quick enough to raise prices if costs keep going up in coming quarters.
If Crocs can't or doesn't pass on costs to its customers, its earnings will suffer accordingly. Therefore, Crocs stock may look cheap right now, but this cheap valuation is entirely warranted if its profits evaporate.
3. Acquisition-related risk
Crocs just spent $2.5 billion to buy casual footwear company Heydude. At more than four times sales, this is a pricey acquisition. Management likes Heydude because it's fast growing, profitable, and increases the company's overall market opportunity. However, integrating one company into another isn't easy.
Moreover, valuations have plummeted since this deal was announced. With over $642 million in goodwill on Crocs's balance sheet, it's possible that the company overpaid and will have to write this goodwill off in future quarters. And the market certainly won't respond favorably.
The good news
In my opinion, the three risks I've outlined for Crocs would be temporary setbacks if they materialized. Discretionary income will likely recover, Crocs can eventually pass higher costs on to the consumer, and the potential negative impact of the Heydude acquisition would fade in significance over time.
As long as the Crocs brand remains popular with consumers, operating results should be strong. Of course, past results don't guarantee future outcomes. However, Crocs's revenue has increased tenfold over the past decade, which suggests this brand is more than a fleeting fad.
CROX Revenue (TTM) data by YCharts
Therefore, I'm comfortable predicting that Crocs has staying power, meaning it can overcome its challenges and create enduring shareholder value. As we've seen, it's possible that results can be negatively impacted in the near- to medium-term from exogenous factors. However, the market has put this stock on sale in light of these uncertainties.
This is a bargain buy that I believe long-term investors should exploit. I think Crocs stock is a great addition to a diversified portfolio today.
