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Bull/Bear Report: Time to Snap Up CROX?

I have to admit that Crocs (CROX), the maker of rubber sandals, has the profile of a stock that Rational Investors absolutely love. This former high flyer has been getting crushed on a series of missteps and unfavorable economic circumstances.

The end result is that CROX now trades for substantially below previous highs at a valuation that is frankly too compelling to avoid.

I am a raging bull on this stock. There is no doubt about it. In fact, if conditions persist for the remainder of the year, I would be quite tempted to make CROX my stock of the year for 2009.

For years, stories like CROX have helped me generate returns that significantly outperform the market. Typically, some temporary event sends investors to the exits as is the case here.

That exodus produces an irrational valuation that is very inefficient. Rational Investors can step into the vortex and capitalize. It is really quite simple.

Oh, I get the reasons for avoiding the falling knife and all, but I cannot help myself when a fast growing company falters. Just remember that over the long haul companies thrive and rarely fail.

In my opinion what is happening with CROX is a result of the weak economy. We are already seeing evidence that the worst may be behind us. Blink and you may just miss the recession.

Even if weak economic conditions persist, most of the downside has already occurred with CROX. If you are a long term investor, time tends to heal all wounds and I think that will happen here with CROX.

Buy, buy, buy I say!

With that very bullish opinion in mind, read on to get two bear counter views from our bloggers.

Bear Case - ahknaten

Ahkenaten has been on the record as not liking CROX for a while, and he still doesn't like what he sees.

This week CROX announced earnings, and folks got excited and the stock went up 10%, well guess what? I still dislike it and I'll still short this footwear company that seems to act like a volatile biotech stock.

Now, not to toot my own prediction, but back in this article, I had complained about CROX and made this statement:

"Avoid this one, pick up a copy of Backpacker magazine, read the reviews on hiking shoes and buy something else instead"

And so I got a subscription to Backpacker magazine, I'm reading their Gear Guide and I'm going to buy something other than CROX for my hikes this year. By doing so, I have avoided the -55% drop that the stock has experienced since that time. I don't always get these stock predictions right, but when it happens to go in my favor - it sure feels good.

Now, once again I'll look at the value, quality, smart money and growth stories for CROX.

Value
CROX has a low (nice?) PE and price/book, but it also has high (poor?) price/cash flows. With updated earnings into my model, I get a price target of $13. With the poor price/cash flow, it's a 'short', but the other variables tell me that it's a 'Long'.

Quality
CROX has high (poor?) accruals and a high F-score. Short.

Smart Money
Poor high short interest, but the insiders haven't sold recently. Now, for those who don't think that insider selling counts, what do you think of the insider selling that happened last year when the stock was at $40, $50, $60? Does it make you pause and wonder: Did the insiders know something? Did they think it was overpriced? Should you have thought the same? Short, but if the insiders buy more and the short interest declines, then it's a 'Long'.

Growth
They have very high sales growth, and in my opinion that can't continue. Short.

My Opinion
I think CROX could appeal to some value investors hoping for a turn-around story, it could also appeal to those growth investors that love fluctuating high growth rates. But, with high price/cash flows, high accruals, a high F-score, high short interest, and "abnormal" growth rates, I'm going to pass on CROX and stay 'Short'.

Bear Case Part II - Don Barrett

Don took a good hard look at the fundamentals, and came to the conclusion that CROX is full of holes.

Crocs were originally manufactured by a company called Western Brands based in Minot, Colorado. The name was changed to Crocs as Western Brands just didn't seem to fit the little plastic shoes that are full of holes. Crocs are sold at 29 company-owned stores,174 kiosks and 6 retail outlets. Crocs are also marketed at a large selection of customer owned retail outlets. Crocs at the beginning was shoes, but after research and development have developed an array of athletic equipment including knee pads, gloves, backpacks and many other products all made out of resin.

Crocs issued their 1st quarter 2008 results today and we'll try and decide if Crocs is gaining traction or just full of holes. Revenues for 1st quarter 2008 increased by 39.8% when compared to 1st quarter 2007. Crocs sales increased by over 11% domestically and international sales increased by over 79%. Sales for the first quarter 2008 increased to $198 million from sales of $142 million for 1st quarter 2007. Yet for the 1st quarter 2008 Crocs reported a loss of $ 4.5 million compared to a net income of over $29 million for 1st quarter 2007. Crocs reports the results were affected by a $20 million charge related to a plant closing in Canada. Crocs reports they took a $12 million charge this quarter related to the Canadian plant closing and if they disregarded "part" of the $12 they would have netted over $7 million on a non-gap basis.

Crocs 1st quarter 2008 sales increased by $56 million for the quarter and cost of sales increased by $56 million. The major cost increase for the quarter was an increase of $29 million for SG&A expenses. Crocs also paid no income taxes for the 1st quarter 2008 due to the reported loss and they paid $ 12 million in taxes for the first quarter 2007.

Crocs issued guidance for 2008 saying they expect revenue growth of 10 to 15% over 2007 and diluted earnings of $1.54 to $1.64 per share. If you look at all the variables and Crocs has already reported a loss for the 1st quarter I think they will fall short of projections and I think Crocs is full of holes.

A return to the bullish case

Again, I get the reasons not to buy CROX. It is very difficult to buy something that looks to be broken. Yes, management has made some mistakes, but those mistakes, mostly inventory control, are fixable in my opinion.

In my opinion, it is worth the speculation. For comparison take a look at the history of Deckers Outdoor (DECK). If you recall, not too long ago DECK was a sandal company with similar issues to CROX.

The company lost its mojo and shares languished.

Those that bought in at that time (I was one of them) made a huge return as the company recovered with huge growth in its UGG boot product. The same thing can happen with CROX.

Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs

Other Resources on CROX

Goodwill Hunter: Crocs Fad or Folly?

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Bull/Bear Report: Time to Snap Up CROX?

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