Friday Winners: Crocs Re-Emerges From the Dead

Shares of Crocs (Nasdaq: CROX) continued their remarkable rebound, only a year after many had assumed that the once-hot footwear maker would not survive much longer. An impressive quarterly report released Thursday evening pushed shares up +8% in Friday trading. Crocs’ plastic shoes are either loved or loathed, with many deriding them as a mere fad. But the company’s supporters were undercounted, and are now buying new pairs of Crocs shoes at a brisk pace.

We got a sense that things were turning around when Crocs reported a surprise profit for the September 2009 quarter. Then again, summer time should be profitable for this maker of outdoor-oriented footwear. The December quarter, which is seasonally weak, showed an expected loss, but Crocs just surprised the Street with unexpectedly robust first quarter results. Sales jumped +24% from a year ago, and profits of $0.07 a share were well ahead of the $0.02 forecast. That should set the stage for even more robust profits now that Crocs is in its seasonally most important quarters.

#-ad_banner-#Going into the quarter, investors were looking for Crocs to post +5% to +10% sales growth throughout this year. Now, those expectations are likely to sharply rise. The current 2010 consensus profit forecast of $0.30 a share looks to double as analysts revise their models. Profits for 2011, even if the current sales momentum moderates, could exceed $0.75 a share.

Crocs’ sales strength is due to a belated decision to expand into international markets. Those efforts are now bearing fruit as sales in Europe and Asia rose +34%, and +40%, respectively. Sales in North America rose a more modest +10%. Notably, interest in Crocs’ shoes appears to be just building in these foreign markets, so those growth rates may have some staying power until the markets mature.

Even though shares have already sharply moved up in the last year, they still hold appeal, trading at about 13 times 2011’s expected profits. A multiple of about 20 seems more appropriate for a company with a strong brand, a loyal customer base and growing international prospects. That target multiple represents +50% upside beyond today’s impressive move.

Company Name (Ticker) Intra-Day Price Market Cap 52-Week High 52-Week Low 2010* P/E 2011* P/E
Crocs (Nasdaq: CROX) $10.30 $883M $11.40 $2.13 34.3 19.4
Insulet (Nasdaq: PODD) $14.21 $536M $16.50 $5.45 Negative Negative
Biodel (Nasdaq: BIOD) $5.84 $132M $6.02 $3.22 N/A N/A
*Based on consenus estimates prior to recent earnings release

Insulet (Nasdaq: PODD), a maker of insulin infusion systems for diabetics, is a leading gainer Friday, posting a +7% jump on the heels of robust quarterly sales growth. First quarter sales rose +67% from a year-ago, continuing a long-standing trend. Insulet’s insulin pump and monitoring system is very user-friendly, and the company is starting to take market share from the major players such as Johnson & Johnson (NYSE: JNJ). Fairly low penetration rates coupled with an expanding sales force and international expansion have led many to anticipate continued strong sales growth for Insulet, perhaps around +40% both this year and next.

Gross margins are expected to rise from their current 40% to around 50% within a year, but that doesn’t mean the company will be profitable. Operating losses are expected for quite some time to come. So how do you value a fast-growing stock that has no earnings power in evidence just yet? Many investors compare the market capitalization to the annual revenue base, known as the price-to-sales ratio. By that measure, shares trade for about six times projected 2010 sales and 4.5 times projected 2011 sales. That’s not especially high for a company posting such rapid growth. Trouble is, a lofty price/sales multiple is usually associated with companies with gross margins in excess of 70% or even 80%.

Insulet is building a very appealing business, but it’s fair to expect growing pains. One of these days, the company will post a hiccup in quarterly sales, and that will likely create a chance to get into this stock while it’s temporarily discounted. Insulet is a name to put on your watch list for a pullback.

Speaking of companies in the insulin management space, shares of Biodel (Nasdaq: BIOD) surged more than +10% during Friday trading. You would probably assume the developer of novel diabetes testing and treatment products posted impressive sales results. Actually, sales were zero. The quarter held no positive “surprises,” but management did discuss a willingness to partner up with larger pharmaceutical companies. That news implies that a nice cash infusion may be coming.

Analysts at Wedbush Morgan think Biodel is facing a potential $900 million revenue opportunity — seven times the company’s current market capitalization. As with most biotechs, this is highly speculative, but it does appear to be a fairly well-kept secret ahead of potential partnership announcements.