I'll start with an unfair pitch to grab your attention. There's a stock out there trading for less than six times this year's projected earnings. It's expected to grow its top line by 52% this year. It's not an energy, commodity, or real estate stock, prone to cyclical swings between feast and famine; it's a consumer stock. It's a name you know, and perhaps one you might already have a bearish opinion on.
I'm talking about Crocs (CROX 0.90%), the company that's been turning heads for the past 20 years with its signature hole-laden footwear made with proprietary resin materials. The numbers I mentioned when I was cosplaying as a carnival barker a paragraph ago are correct. Analysts see Crocs growing its sales 51.6% this year. The stock is trading for 5.5 times this year's bottom-line target.
But I also said it was an unfair pitch. Things aren't as rosy as those two numbers suggest, but I think you might still like what you see once we walk a mile in the footwear maker's shoes.
The "hole" truth
Crocs have never been as popular as they are right now. The rubbery clogs were initially marketed as boating shoes in their 2002 launch -- and then embraced by teachers, nurses, and security guards for their comfort with folks spending a lot of time on their feet.
And they have since gone Hollywood. Celebrities and social media influencers have taken a shine to the unique and cozy footwear, and this will be the fourth year in a row that Crocs delivers double-digit growth.
It's probably time to burst the two balloons behind my initial power pitch. The 44% top-line growth that Crocs posted in this year's first quarter -- and the 52% to 55% that it was targeting in sales growth for all of 2022 back in May -- is not organic. Crocs closed on its $2.5 billion deal for the Hey Dude footwear brand earlier this year, inflating its top line. Crocs expects its namesake brand to grow its revenue by more than 20% this year.
Then we get to the earnings multiple. Just $450 million of the $2.5 billion Hey Dude purchase was in stock. Crocs had to borrow roughly $2 billion earlier this year to close the deal, inflating its enterprise value. May guidance calls for Crocs to post adjusted earnings per share between $10.05 to $10.65 for 2022. It's an earnings multiple just shy of six, but if we go with what is now the much higher enterprise value instead of market cap, the multiple grows closer to nine times earnings.
The valuation is still very compelling, but things could get hairy when Crocs reports second-quarter results in two weeks. A hearty 42% of its sales in the first quarter came from outside of North America. A theme we're seeing early this earnings season is the impact of the higher dollar whittling down reported growth overseas.
It's still hard to bet against Crocs. It has consistently exceeded analyst profit targets, while defying critics calling the shoes a fad. And even the Hey Dude deal that was initially panned by the market late last year is a transaction that will be accretive to financial results.
Crocs footwear has proved that it's not a pet rock for your feet. Sales have grown in 15 of the last 20 years, and it's been at least double-digit revenue growth for 12 of those 20 years. It's an unlikely growth stock, but a growth stock nonetheless. It's an unlikely value stock, but a value stock nonetheless.