Essay about Crocs: Revenue and Growth Rate

1225 Words Apr 12th, 2011 5 Pages
“Crocs, Inc.” (UVA-F-1589)
1. Which of the comparable companies appears to be a good match to Crocs at the time of
the case? Which would be a good match in five years? Use these multiples to provide
additional estimates of the value of Crocs (in other words, calculate a value for Crocs
using a current multiple, and calculate a value for Crocs using Yeung’s cash flow model
but with a terminal value based on a multiple).
Using EV to EBITDA multiple:
- Current Crocs’ multiple is 27.74. Comparable companies that apprear to be good match to Crocs at the time of the case are Under Armour (32.00), Zumiez (21.27) and Deckers Outdoor (20.21).
- In 5 years, Crocs’ multiple is equal to EV (2011)/ EBITDA (2011) =7154/791=9.044248. Comparable
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What changes in the growth assumptions would rationalize the new Crocs stock price?
(Please see Appendix: Valuation Calculation)
The change in the growth assumption has significant impact on the stock price. Under the high estimate of growth rate 236%, the new price per share is $107.56. Under the low estimate of growth rate 35%, the new price per share is $2.36.
These changes in prices imply the power of growth rate’s assumption over stock price because “It was growth that drew attention to the brand. It was growth that propelled the stock offering. It was growth that drove the stock price to ever greater heights.” When the growth rate is expected to increase significantly, value of the firm is increased tremendously and so is its stock price. Both the enterprise value of the firm and its stock price change in the same direction with the change in growth rate estimates.
4. What is your opinion of the assumed profit margins? What alternative assumptions would
you consider reasonable?
We assume that Net fixed assets as percentage of sales will eventually become constant at 1%, and revenue growth rate will eventually become constant at 6%, thus the assumed profit margin will also eventually become constant. It is reasonable to assume that at the beginning the profit margin increases because Crocs enjoys economics of scale and direct sales…