Last August, The Value Meter took a look at niche shoe manufacturer Crocs Inc. (Nasdaq: CROX) and rated the stock as “Slightly Undervalued.”

I was impressed by the company’s growth. The shoe brand had just seen second quarter 2022 sales increase 19% year over year.

Even better, despite this growth, the stock was trading at a very attractive single-digit price-to-earnings (P/E) ratio.

Since then, the stock market has taken a liking to it as well.

Crocs shares have jumped from $72 to $121. That’s a 68% increase in just over six months!

While I definitely liked the opportunity in Crocs shares last August, I did have one concern…

The company had recently spent $2.5 billion acquiring the rapidly growing Hey Dude shoe brand in February 2022.

I liked the acquisition but didn’t love that Crocs had taken on a huge amount of debt to finance it.

Prior to the acquisition, Crocs’ balance sheet was pristine. I hated to see that change.

So far, though, the Hey Dude acquisition looks like a rousing success for Crocs.

Revenue for the Hey Dude brand increased by 70% in 2022 to $986 million.

Not only is that terrific revenue growth, but it also vastly exceeds the $700 million in revenue that Crocs’ management expected Hey Dude to generate this year.

Even better, Crocs’ management has gotten to work reducing the debt that was taken on for the acquisition.

Since the start of 2022, Crocs’ long-term debt has already gone down by $500 million.

Further, Crocs’ management has committed to use all its free cash flow to continue to reduce debt until it hits its target debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 2-to-1.

So I expect we are going to see another $500 million in debt reduction in 2023.

Once there, free cash flow use will be split between additional debt reduction and share repurchases. Management’s long-term debt-to-EBITDA ratio goal is 1-to-1.

Clearly, the company is firing on all cylinders. But with an 68% rise in Crocs’ share price, how does the valuation look now?

Last year, Crocs’ earnings per share came in at $8.71.

Consensus analyst earnings estimates for this year are $11.19, which would be an impressive 28% increase.

With a stock price of $121 as of this writing, Crocs is currently trading at a P/E ratio of 11.4 times consensus 2023 earnings.

That hardly seems like an expensive price for a company that is growing as fast as Crocs is.

On an enterprise value-to-earnings basis, it does look a little more expensive but still attractive.

My concern with Crocs has always been that it has a faddish product. I thought that in 2010 when I bought my then-3-year-old daughter an adorable pair of Crocs.

Then I thought it again last week when I bought my now-16-year-old another pair of Crocs for her birthday.

But with 13 years between purchases, it doesn’t feel like a fad anymore.

(Not to be left out, my other daughter wants to go buy a pair of Crocs this week too.)

While Crocs isn’t as cheap as it was last August, it still looks attractively priced relative to its rate of growth. Increasing my conviction is management’s continued focus on debt reduction.

Despite the 68% rise in share price since I first looked at the stock, The Value Meter still rates Crocs as “Slightly Undervalued.”

— Jody Chudley

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Source: Wealthy Retirement