Here’s My Crocs Investment Thesis – The Short Version

(the longer version includes more subjectivity and judgments)

A) REVENUE AND MARGINS FROM THE CROCS INC (NASDAQ: CORX) ANNUAL REPORT
Revenues increased $95.1 million, to $108.6 million, in the year ended December 31 2005, from $13.5 million in the year ended December 31, 2004. This increase was primarily a result of significantly higher unit sales of our footwear products, which increased to 6.0 million pairs for the year ended December 31, 2005, from 649,000 pairs for the year ended December 31, 2004. Net income for 2005 was $16.7 million (15.4% of revenue).

WHAT IT MEANS: Revenue of $18.10 per pair of Crocs sold and net income of $2.78 per pair of Crocs sold.


B) PRODUCTION CAPACITY FROM THE CEO (QUOTED IN THE APRIL LA TIMES ARTICLE)
Crocs Chief Executive Ron Snyder said the company was expanding its geographic reach after beefing up its production capabilities around the world over the last year. At the beginning of 2005, Crocs could make just 100,000 pairs a month — and was selling all of them. By the end of that year, it had the capacity to make 2 million pairs a month, he said. “Now we have ample production to ship into the more populated areas of the U.S. and abroad as well,” Snyder said.

WHAT IT MEANS: Crocs has a production capacity of 24 million pairs per year.

C) SHARE COUNT FROM THE ANNUAL REPORT AND CROCS INC PRESS RELEASE
According to its annual report, Crocs had weighted average diluted common shares outstanding at 12/31/05 of 38.52 million. According to its February 8, 2006 press release regarding the pricing of its IPO, the company was “offering 4,950,000 shares of common stock and selling stockholders are offering the remaining 4,950,000 shares.” Also according to that press release, the “selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 1,485,000 shares at the initial public offering price to cover over-allotments.”

WHAT IT MEANS: Post IPO share count, not including any Q1 options grants or other changes, should be about 43.47 million shares (38.52 + 4.95). We’re not counting the shares sold by the selling shareholders because those were not new shares being issued, but existing shares being sold to the market.

D) CURRENT ANALYST ESTIMATES FROM YAHOO FINANCE
As of today (April 27), Yahoo Finance reports three analysts have estimates out on the stock. The highest revenue estimate for 2006 is $177 million and for 2007 is $222 million. The highest EPS estimate for 2006 is $0.72 and for 2007 is $0.93. For the quarter ended March 31, 2006, the highest revenue estimate is $36.1 million and the highest EPS estimate is $0.14.

E) MY BACK OF THE ENVELOPE MATH – BEST CASE
The maximum revenue for 2006 is approximately $434 million ($18.10 per paid of Crocs sold times 2 million pair per month capacity times 12 months). If net income margin stays the same net income will be $66.8 million. Keeping margins the same would assume economies of scale (operating leverage) was offset by competition and the economic principal of diminishing returns. Assuming no change in the share count, which is unlikely, the EPS would be $1.54, which works out to about a 250% increase from the 2005 EPS of $0.44. Based on today’s stock price of $28 and $1.54 in earnings, the P/E ratio would be 18.2. Not super cheap, but then again not expense for a growth stock.

F) MORE OF MY BACK OF THE ENVELOPE MATH – BASE CASE
If Crocs has an 80% capacity utilization rate (i.e. it produces 80% of it’s maximum 2006 production capacity) and it sells 80% of shoes produced in 2006 it will sell 15.36 million shoes. If it maintains average selling prices of $18.10 it will have revenue of $278 million (and this assume no revenue boost from new products). If it maintains it’s 15.4% net margin it will generate $42.7 million in earnings. If share count goes up by 1 million shares, which is just a guess based the size of the company, then EPS will be $0.96 per share. Based on today’s stock price of $28 and $0.96 in earnings, the P/E ratio would be 29.1. Not cheap, but then again not too expense for a growth stock.

G) MORE OF MY BACK OF THE ENVELOPE MATH – WORST CASE
My worst case scenario is an earnings miss brought about by production problems or competition driving down prices. Other scenarios include, but are not limited to, the possibility of summer demand not materializing and inventories building, foreshadowing a slowdown and lower prices. These types of things are possible and normally cause a lot of selling.

G) WHAT’S IT ALL MEAN?
It means I think the three analysts with estimates out on the stock have grossly underestimated the revenue and earnings that Crocs Inc. is going to deliver. For the quarter ended March 31, 2006, my model estimates revenue of at least $50 million and EPS of at least $0.20. And that’s the LOW end of my estimate. The high end is revenue of $64 million and EPS of $0.26, or almost double the highest published Wall Street estimate. What does that mean? It’s means I think there will be a significant upside surprise for the quarter and the year and that analysts will quickly raise their estimates and come out with buy ratings on the stock. We will see. This is sheer back of the envelope math on my part and I recommend you do your own analysis before buying or selling any security, especially a brand new issue with a high short interest and so many unknowns. And I recommend that you read the disclaimer on my website completely.

I also hope that if you do find this analysis helpful and it does make you money that you use the donate button at the top left of my website to say thank you. I am living in Sweden right now, getting ready to marry my fiancée. I am not working yet and hope to earn some money from this blog and/or have one of you in the investment community in the U.S. or Europe contact me about a position that may be available at your firm. Thank you for your sponsorship. Now let’s see where this volatile stock takes us. We should know in 10 days or less. Cheers!

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CROCS INFO:
Index of my recent CROX postings
Crocs on Amazon.com

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