One of the best-performing stocks in the recent past has got to be Crocs (CROX +0.38%). The maker of those popular foam clogs has seen its shares soar 315% in the last five years, crushing the gains of the broader indices.
But prospective investors in this footwear business who have been on the sidelines might have something to get excited about. Crocs shares still trade at a price-to-earnings ratio of just 7.7. This looks like a ridiculous bargain given some of the company's positive attributes.
Here's why investors should buy this severely undervalued stock before everyone else catches on and does the same.
Sizable growth
Look at Crocs' financials and you'll quickly realize that growth is a huge part of the story. During the three-year period between 2018 and 2021 (this excludes the HeyDude acquisition in early 2022 for a cleaner comparison), sales rose at a compound annual rate of 28.6%. There's no doubt in my mind that Crocs was able to rapidly steal market share in the mature footwear industry.
An industry heavyweight like Nike, which has one of the most recognizable brands on the face of the planet, doesn't even come close to Crocs when it comes to top-line gains in recent years. And even this year, Crocs is still posting solid growth, as revenue jumped 11.2% in the second quarter to just under $1.1 billion. It's encouraging that the business isn't giving up some of the huge demand it benefited from during the pandemic.
Investors also need to start appreciating this company's brand presence. Piper Sandler just released data not too long ago from its latest Gen-Z survey, and it showed Crocs and HeyDude holding the sixth and seventh spots, respectively, as the most popular shoe brands among teenagers. That's certainly a good position to be in, demonstrating the relevancy of the business and its products.
The outlook over the next few years is pretty robust. Wall Street anticipates sales hitting $5.8 billion in 2027, up from $3.6 billion in 2022. While that growth rate is undoubtedly slower than in that recent past, it still would be a healthy expansion.
Management sees a big opportunity to penetrate China, the world's second-largest footwear market (the largest being the U.S.). This is the right strategic focus, as the Asian nation has a burgeoning middle class that consumer-facing brands need to target.
Besides broadening its geographic reach, Crocs also hopes to expand its product portfolio. The HeyDude acquisition brings another casual shoe line under the corporate umbrella. Additionally, the goal is for revenue from sandals to quadruple between 2021 and 2026.
NASDAQ: CROX
Key Data Points
Impressive profitability
That consensus analyst sales forecast I just alluded to of 10% per year is impressive, but investors should know that earnings per share are set to rise at a much faster annualized clip of 17%. These kinds of gains are exactly what can propel the stock price in the coming years.
Crocs is an extremely profitable enterprise, with a gross margin of 52.3% and an operating margin of 23.9% last year. I hate to keep picking on Nike, but margins are another category that Crocs excels at when compared to the Oregon-based company.
I can come up with a couple of reasons for this outsize bottom-line performance. Crocs' gross margin indicates a certain level of pricing power, which shows that consumers see enough value that they're willing to pay up for those foam clogs.
Secondly, capital expenditures are incredibly low, at less than 5% of revenue through the first six months of 2023. Because of the simplicity of the company's key product, the company is likely not investing much in research and development dollars. This situation will continue having a favorable impact on profitability.
It's hard to come up with an explanation for why Crocs shares are so beaten down. Whatever it may be, smart investors won't hesitate to scoop up the stock and hold for the long term.
