The crux with the Crox valuation

Can someone please help me justify why any investor would be buying Crox, Inc. (CROX) at these price levels?

Some financial facts:
- Price to Sales multiples of 9.4x on 2006 sales and 4.7x on 2007 sales
- Price to Earnings multiples of 51.6x on 2006 income and 25.8x on 2007 income
- Cumulative Net Income from 2003-2006 equal to $78.3 million; resulting in a cumulative Free Cash Flow from 2003 to 2006 to $(2.6) million..putting a significant amount of faith in the management with the re-investment.

After completing my initial analysis on this stock, I am hesitant to issue a “Sell” rating because of the following
#1. Significant amount of shorts that may cause a short squeeze
#2. A Consistent “Buy” recommendation from Jim Cramer and his following
#3. A recent stock split (historically stock splits have provided favorable returns to equity owners one year post split)….

Therefore, I am putting this as a “Hold” waiting for the first sign to short sell, specifically missing the Q2 sales estimate…

With a market cap of $3.3 Billion, CROX has experienced a recent decline in their share price since the stock split on June 15th.

Figure 1. Stock Performance

Don’t get me wrong, CROX deserves some credit with the growth rates that the company has achieved to date. I just don’t think there is enough gas in the tank to meet future analyst growth targets. Here is a chart showing Sales and Income growth rates by quarter.

Figure 2. Sales and Income Growth Rates.

With the above initial valuation metrics that I have provided, I also completed a discounted cash flow model on the stock to see what it would take to justify today’s $3.32 Billion price tag.

Summary or Assumptions to justify valuation:
- Forecast Time Period: 2007 - 2013 (7 years)
- Using the Analyst sales forecast to 2008, then growing sales at the following rates: 2009 @ 25% declining to 5% in 2013
- Net Income Margin of 18%, consistent with analysts

- Free Cash Flow % to Net Income of 25% in 2007 growing to 110% in 2013

- WACC of 12% and a Terminal Rate of 5%

Significant Risks:

- Annual sales growth profile from 2007-2013 in the face of competition and keeping the brand fresh

- Risk of CROX net income margin erosion due to new licensing agreements for Warner Bros. and Looney Tunes characters

- 5% Terminal Rate staring in 2014

Figure 3. CROX DCF model

Disclosure: Author does not own or is short CROX at the time of publication.

Sources:

Yahoo Finance

SEC Filings

Morningstar.com

Company website