Under these assumptions, I obtain a fair price estimate of $18.91 per share, which implies a 43% upside potential. Assuming a 15% growth rate for the next 10 years implies a $21 price target and a 59% upside. Finally, under a pessimistic scenario, even if Crocs grows only 9% yearly for the next decade, the price target would be $15.40. That still implies a 16% upside.
Source: Oldschoolvalue
Analysis of competitors
Privately-owned Havaianas, Merrell and Patagonia Footwear from Wolverine World Wide, Inc. (NYSE:WWW) and Sanuk and Teva from Deckers Outdoor Corp (NASDAQ:DECK) are also in the business of making casual shoes and sandals, and therefore qualify as representative competitors.
Last year, Wolverine World Wide, Inc. (NYSE:WWW) acquired Collective Brands and now owns several strong shoes brands, including Keds, Saucony and Sperry Top-Sider. The acquisition clearly helped Wolverine World Wide, Inc. (NYSE:WWW) to increase its revenue 88% year-over-year to $588 million in the latest quarter. And gross margin increased 41% so far.
With 16 strong brands under its belt, marketed in more than 100 countries all over the world, WWW does look attractive as an investment. However, the current market valuation may not represent an adequate entry point. Trading at a 36 price-to-earnings ratio, this stock has one of the highest valuations in the industry. And unlike Crocs, Wolverine World Wide, Inc. (NYSE:WWW)’s current market cap is much bigger than its year revenue base.
Deckers Outdoor Corp (NASDAQ:DECK), on the other hand, had a mixed second quarter. The company reported revenues of $170 million, which represented a 2.5% decline from the year ago period. And it lost $0.85 per share. The good news is that the street was expecting bigger losses.
Judging from its recent losses and from the volatility of its revenue base, it seems that Deckers Outdoor Corp (NASDAQ:DECK) business is way more cyclical than Crocs. In particular, its UGG brand could be exposed to weather conditions, simply because they are winter shoes. More importantly, the Teva brand (flip-flops), which directly competes against Crocs, Inc. (NASDAQ:CROX)’s clogs, saw an 8.4% decrease in net sales. But not everything is bad news. Sanuk was probably the only main brand that experienced a meaningful sales increase: 7.5%. Distributed across 50 countries, the flip-flops brand could be an early star product in Deckers Outdoor Corp (NASDAQ:DECK) portfolio.
Notice that both Deckers Outdoor Corp (NASDAQ:DECK) and Wolverine World Wide, Inc. (NYSE:WWW) have much higher price-to-earnings ratios than Croc’s 11.8 figure.
Final foolish thoughts
Crocs, Inc. (NASDAQ:CROX) shouldn’t be experiencing negative returns. The company simply had bad luck in the latest quarter due to adverse currencies fluctuations and a one-time big tax payment. Revenues, on the other hand, keep growing, unlike those of competitor Deckers Outdoor Corp (NASDAQ:DECK).
Trading at a very low price-to-earnings ratio and selling more shoes in one year than its total market capitalization, Crocs is clearly undervalued at $13. Considering that the core business remains strong, I expect a meaningful improvement in margins next quarter. The market will wake up then. However, the time to go long is now.
The article This Dirt Cheap Shoemaker Has 50% Short Term Upside originally appeared on Fool.com and is written by Adrian Campos.
Adrian Campos has no position in any stocks mentioned. The Motley Fool owns shares of Crocs.
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