Hidden Value Stocks issue for the second quarter ended June 30, 2023, featuring an update from Choice Equities, discussing their latest idea Crocs, Inc. (NASDAQ:CROX).

The June 2021 issue of Hidden Value Stocks contained an interview with Michell Scott, CFA, the founder and portfolio Manager of Choice Equities.

In the interview, Scott highlighted Select Interior Concepts, Inc. (NASDAQ:SIC) as one of his top investments. Four months after the issue was published, Select was acquired by Sun Capital Partners, Inc., at a 53% premium to the price when recommended.

Choice Equities Discusses Crox

One of the fund manager’s latest ideas is Croc’s Inc. We first highlighted this idea in the Q1 issue of Hidden Value Stocks, and since then, the stock has gone through a rocky period. After spiking 20%, it dropped back following a poorly received earnings report.

However, the fund manager is confident in the company’s outlook. Here’s a condensed extract from Scott’s initial thesis, which won its category in the 2023 SumZero Top Stocks competition:

“In our projections, the base case assumes that in 2026 CROX can produce revenues of just over $7.4B, with an EBITDA margin of 26% by 2026, along with an annualized top-line growth rate of 21% over 2023 through 2026. Our base case for CROX legacy product revenue growth includes 2023-2026 CAGRs of 14%, 18%, and 27% in North America, EMEALA, and Asia Pacific.

In addition, we break down these assumptions further and estimate that clogs will grow at a CAGRs of 15%, 26% for sandals, and 19% for Jibbitz.

Lastly, in our base case assumption, we estimate that HeyDude will reach $2.4B in sales by 2026…in the past the company has been an active acquiror of their own shares and has stated they will likely resume purchases once their gross leverage again falls below 2x…a ~20% shrink in the share count would produce EPS at or above $33 per share in 2026. At a 15x PE multiple, we find this to be a surprisingly defensible upside scenario for shares to approach the $500 level.”

Following the company’s Q1 earnings report, the fund manager noted the following in his May letter to investors:

“Last week’s quarterly report was the second report in a row that seemed to sow some confusion among investors. Much like the most recent quarterly report, the company effectively surpassed expectations on nearly every metric, and then offered a puzzlingly subdued set of expectations for the upcoming quarter.

In sum, the total body of work suggests a company meeting its customers with desired products at their preferred points of purchase with healthy double-digit growth across several vectors like Jibbitz, the traditional clog silhouette and HeyDude while other end markets like sandals, China, EMEALA and HeyDude in the DTC channel all enjoyed growth in excessof 20%. Today, shares trade around ~10x growing earnings, a substantial discount tomost of its peers, despite being considerably more profitable.”

This article originally appeared on ValueWalk

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