SUBMITTED TO PROF. NEIL COHEN School of Business and Public Management The George Washington University
BY Anil Kumar Cheerla
FINA 6224 FINANCIAL MANAGEMENT
WASHINGTON, DC January 26, 2011
Q1: Consider which comparable peers are good matches and use them to perform a multiples analysis, calculating and defending an estimate of Crocs value. Soln: Comparable companies analysis – Done to determine appropriate valuation multiple for Crocs, Inc. • • Selected peer group based on industry, business and financial characteristics Included explosive growth stocks such as Lulelemon & Under Armour having similar prospects for growth and ROIC as Crocs, Inc. and some mature, stabilized businesses with stable industry growth rates – Nike, Deckers & Timberland. This mix will help us provide valuation from an aggressive sales growth and maturing sales context. Some characteristics used in selection include – o Primary or at least significant portion of business revenue comes from footwear & apparel – analogous to Crocs primary business o Has product appeal to large group of customers o Has distinct product attributes (innovative/creative) and differentiation from competition o Has wide range of distribution channels o CAGR Sales growth, COGS to Sales & Significantly less debt exposure on their balance sheets o Have characteristics of high octane growth and show signs of maturity and stabilizing long-term growth similar to well established footwear brands.
Valuation Multiples The objective was to compare operating metrics and valuation multiples in a peer group to that of Crocs, Inc. for equity valuation. The market multiple model is based on the idea that on average, a company, over time would have roughly the same value as its peers. Assumption: The companies chosen as comparables, Deckers, Nike, Timberland, Lululemon & Under Armour reflect similar characteristics as Crocs, Inc in terms of industry, operations and financial returns. The four multiples used were price/earnings, price/sales, price/EBITDA & price/BV of equity. Using the valuation and operating data provided, the following multiples were calculated:
Fig1. Multiples Valuation for peer firms
Although I contested the selection of Lululemon and Under Armour as comparables, I still retained them in order to use their high octane growth as a yardstick to shed light on Crocs valuation. The business
models followed are completely different, but both have become a fad hit with consumers and display traits similar to Crocs, Inc. The valuations for the target firm, Crocs were calculated based on the income statement and balance sheet provided as exhibits. All the numbers are representative of Crocs 2007 financial statements. The calculated target value and the equity valuations are listed below:
Fig2. Target Firm Valuation
As observed from the table above, Crocs has shown a wide range of equity valuation from a low $5.28 based on book value to the high $103.84 based on earnings. The high valuation can be traced to the explosive sales growth experienced in previous years and in anticipation of that continued triple digit growth. But going back to what appears as fair value, the company is valued way less at $5.28 which is at a discount of 800% over the prevailing market price of $65 (from the case briefing).
Fig3. Sales & Gross Profit growth
As evident from the numbers above, all creditors, investors and other providers of capital will benefit enormously if the expected growth is achieved, but that puts them to a greater risk. The actual market value of equity provides clues that the stock is selling above its intrinsic (real) value. The average equity value of %62.48 is almost close to the current traded market value of $65. This valuation exercise provides us an insight into what should be the value of Crocs in comparison to its peers, but can be misleading because of...