Why Hasn’t Warren Buffett Bought This Stock yet?

We all know that Buffett and Berkshire Hathaway have been talking about their ‘elephant gun’ for some time now as they search for one more large acquisition. With over $330 billion in cash on the balance sheet, of course it makes sense for them to be searching for an interesting acquisition. There could be many reasons why they have yet to ‘pull the trigger’ on anything yet. It could be general market valuations, it could be not being able to find the right type of business or, due to the size of Berkshire, it could be the inability to find a company that meets their requirements while also being large enough to matter. While these reasons might be fair, there has always been one specific company we think checks all of the boxes Berkshire Hathaway would be interested. We have continually been surprised that one of the all-time greats has not yet at least expressed interest in this name.

At a high level, this company has everything that Buffett likes: Strong management team, good capital allocators, earnings power, an easy-to-understand business, and a moat. In terms of valuation, the company also checks most boxes with a forward P/E ratio of 7.88 and forward P/CF of 6.88. The earnings yield is 12.6%, free cash flow yield is 15.7%, and return on assets (ROA) is consistently at or above 18%. While the company might not have ‘shoot the lights out growth’, they can more than likely grow earnings per share at 5% consistently for the foreseeable future and EPS has grown from $3.22 in 2020 to an expected $13.09 in 2025. So what is this elusive company that should fit perfectly into Warren Buffett’s Portfolio?!

Crocs Inc (CROX).

Let’s dive a bit deeper into some of these metrics on why it fits so well. On the more qualitative side, the management team has done a stellar job over the years, led by Andrew Rees since 2014 where shares traded in the $15 range and now trade around $100 (while still remaining cheap). The CEO has navigated the company through numerous types of economies and markets while expanding internationally. Recently, Terence Reilly has been brought (back) on board to turnaround their somewhat recently acquired HeyDude business. Terence was a big part of building the Crocs brand initially and left to go to the now popularized Stanley drinkware brand, being a big part of building that brand as well. Terence has now come back to Crocs to help out with HeyDude. Tying in with the management team is capital allocation and Crocs has been a fantastic allocator. They have been continuous buyers of their shares at attractive prices and are not afraid to finance those repurchases with debt when appropriate. Since 2020, the share count has declined by just over 12% and the company continues to repurchase shares. This is in tandem with a large acquisition the company did where they still managed to pay down material amounts of debt while also repurchasing shares. As the debt load declines, we would expect the buyback cadence to accelerate.

On management and capital allocation, a special note is deserved for HeyDude as many might view this as being a black eye for the company’s capital allocation. What they did get right is doing the purchase with debt, something that spooked markets at first. Now, the company has done what they said over time and delevered the balance sheet without diluting shareholders. In fairness to the doubters, Crocs probably did overpay for HeyDude at the time but strategically, it diversified the business and addressed one of the main criticisms of the company which was that it was a ‘fad’ product. So, while the HeyDude purchase may not have been perfect, we think management went about it in the right way, meanwhile the jury is still out on the turnaround for this business. If HeyDude gets back to growth, there should be plenty of leverage to the bottom line.

So, what about the easy-to-understand business and moat? Crocs makes those once maligned fashion statements that are rubber clogs and receives industry leading margins for them with gross margins in the 55%+ range and profit margins in the 15%+ range. On moat, the fact that they can charge above-average margins is proof of some kind of moat to begin with. The fact that many continue to claim that it is easy to copy or too simple of a concept, yet continuing to maintain and grow market share also shows that there is an intrinsic moat with this business. Say what you will about how you view Crocs, the brand that they have built is an undeniable one. Whenever we travel, my wife’s eyes are constantly rolling in the back of her head as I continually point out when I see Crocs, and yes, they are everywhere: Resorts, hospitals, swimming pools, gyms, in the streets, you name it. Interestingly, and while anecdotal certainly, I have been seeming to notice more and more HeyDudes in ‘the wild’. Finally, the Crocs product and brand seem to fit I perfectly with the Berkshire folksy brand. You could easily imagine Mr. Buffett kicking his feet up during the annual meeting with a neon orange pair of Crocs on his feet and a vendor selling the footwear at the annual meeting!

CROX hits a lot of the qualitative Buffett factors and holds the quantitative ones in spades. The company with a 12% earnings yield is simply cheap. They could repurchase 5% of their shares annually while still paying debt down and generating earnings growth through lower interest costs. Any actual operational growth is just a cherry on the top and this also speaks to a margin of safety in our view. Return on assets is continually strong which further supports the quality of the company and taking a more simple approach, the P/E 7.88X and EV/EBITDA at 6X is outright cheap. Even if you assume declining growth going forward, a solid case can be made for shares, further speaking to the idea of a margin of safety. The main justification that exists for the cheaply priced shares would be slowing growth but as mentioned, the company is still growing and the underperforming HeyDude brand has been masking the stronger crowing Crocs brand. Even with the underperformance of HeyDude, CROX continues to grow. If HeyDude does turnaround, there could be interesting upside and earnings growth, yet we don’t think a turnaround needs to occur for the shares to work.

The main thing that we think would ‘disqualify’ CROX from being on a buy list at Berkshire Hathaway would simply be because of its size. At a $5.9 billion market-cap the company is not small but is not ‘elephant-sized’ either. Maybe it is just crocodile sized for the time being. Regardless, CROX is a unique name that we also think is continually misunderstood. The main pushback on the company we often hear s around the idea of Crocs being ‘campy’ or a fad and simply put, we think this is an outdated view from 10 years ago and the company and brand has ore than proven this is not the case. All you need to do is step outside and look at the ground to see the footwear everywhere. Where Crocs used to have some ‘fad risk’, we now view them as having reserved a permanent spot in the shoe closet. You have your work shoes, dress-up shoes, outdoor shoes, running shoes and your Crocs. You might even have your ‘backyard crocs’, your ‘Family themed vacation crocs’ and croc sandals. So, now a company that may have had one iteration has potential to have multiple iterations and repurchases in that same closet and don’t even get us started on Jibbitz!

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