Unloved Crocs Still Has Bite

As much potential as this depressed stock possesses, it holds real business risk. If Crocs significantly misses its financial targets one more time, I am gone. We will know that in a couple of months. Until now, the company has only given us verbiage that the inventory issue is being resolved, but we haven't seen results yet in the earnings report. So we have a cheap call option on the company executing to its guidance. But I never marry any stock. If things deteriorate, I will sell my position.

However, should Crocs deliver the fundamental goods, it would resemble a stock we bought under similar conditions a few years ago: Deckers Outdoor(DECK). Like Crocs, Deckers had strong growth interrupted by a missed quarter, inventory issues, a big short position and Wall Street loathing. When the company recovered and resumed growth, the shares appreciated nicely, like 10 times in two years form the 2005 bottom. People though we were insane for buying Deckers in 2005.

Crocs probably doesn't have that type of upside. But it could easily triple from here if the company resumes its growth trajectory. Here's how. In a flat U.S. environment, international growth continues to the point of Asia and Europe each matching the U.S. in size. That gives us about $1.4 billion in sales next year. With profit margins flat in 2009 vs. 2008, the company would make about $2.50 per share. In growth mode, the stock should trade for a footwear-group average multiple, currently around 14 times next year's earnings. That generates a $35 stock, and that's not bad for a stock at $9 and change today.

The arithmetic is pretty simple, and the devil is in the execution. I expect Crocs management to execute. If this idea intrigues you, go to the local Crocs store or to its Web site and do some research for yourself. Try the shoes. You might conclude, as I have, that this story is no crock.

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