What happened
Shares of Crocs (CROX 1.53%) are tumbling today, down 4.2% as of 1 p.m. ET. It's not earnings that did this, however; the plastic shoemaker's latest quarterly results aren't due out until next week. Instead, you can blame Walmart's (WMT -0.08%) earnings warning for shaking retail investors' confidence in consumer good stocks today.
Adding insult to injury, Crocs stock was also the subject of a price-target cut.
So what
Last night, Walmart cut its guidance for Q3 and full-year fiscal 2023 earnings, citing challenges posed by inflation, pressure on consumer wallets, and its own efforts to cut its overgrown inventories, which will necessitate discounting wares. Retail stocks are selling off on the news, and Crocs is no exception. To top it off, investment banker Piper Sandler cut its price target on Crocs stock by a stunning 25% to just $90 a share.
But here's the thing: $90 may not be $120, but it's still a good 54% more than Crocs stock costs today. So when you think about it, Piper Sandler's announcement could have been a lot worse news. Indeed, despite cutting its price target, the analyst was quick to remind investors that it still recommends buying Crocs stock, and that it sees the shares' current price as "highly compelling," TheFly.com reported.
Now what
All together now: How "highly compelling" is it?! (And is it compelling enough to buy?)
Well, let's see now. At $3.6 billion in market capitalization, Crocs stock costs only 5.1 times trailing earnings, which sure sounds "compelling." On the other hand, though, the company is carrying a boatload of debt -- $2.9 billion net of cash on hand -- which pushes its enterprise value (EV) up past $6.5 billion.
Granted, even at that valuation, shares of Crocs only cost about 9.3 times EV, which isn't much relative to analyst projections for 21% long-term earnings growth rates. And even viewing the stock in the most negative light possible -- valuing it on its free cash flow of $380 million rather than on its trailing net income of $700 million -- I get an EV/FCF valuation of only 17.1 for the stock, which still looks cheap for a company that is growing profit at 21% annually.
Long story short, I actually agree with Piper Sandler on this one. Crocs stock's valuation really is "compelling" -- and investors who are selling it today may be making exactly the wrong call.
