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Big 5 Sporting Goods isn't a slam dunk but worth the look!

Tuesday, June 24th, 2014

As the market goes up week after week it becomes harder to find good buys. I’m not saying that there are no good buys, but now is when years of experience really pay off.

This is also the time when many investors begin making foolish mistakes by overpaying for low-quality companies just because of the hype or because they are familiar with the company name and maybe the product.

The sad part is their mistakes may not come to surface for 12 or 24 months -- maybe longer -- and then the big decline comes and they blame the stock market, not their lack of research.

Some will say, “That won’t happen to me. I will get out before that happens.” I can’t tell you how many times I’ve heard that over my 30-plus years of investing.

So this is when it is important to rely on professionals who know what they’re doing. Don’t think that just because someone is licensed or works at a big brokerage firm that he or she knows what to do.

Many of these “brokers” or “advisers” are nothing more than salespeople trying to make the next big commission. They have no clue about valuations or a good company from a bad company. When you interview someone to professionally manage your money, does it sound like a sales pitch or does it sound like that person is educated and explaining the investment process?

A company that has come up on my radar is Big 5 Sporting Goods Corp. (Nasdaq: BGFV).This is not a very large company; it has a market cap of $260 million based on the current stock price of about $11.85. The 52-week range of the stock is a low of $11 and a high of $25. Keep in mind when the stock price was $25 the market cap was about $250 million.

The valuations ratios for this company look good, starting off with a current PE of 11.6 versus the industry at 16.4. Price to sales is 0.27, about half the industry average of 0.53. Price to book value -- and I’m talking tangible book value -- is not much above one at 1.45; the industry price to book is 4.6. Lastly, price to cash flow is very attractive for Big Five at 6.1 -- roughly 40 percent below the industry at 10.4.

The company pays a nice dividend of 3.4 percent and the uses only 30 percent of its earnings to pay that dividend, so I think the 3.4 percent yield is fairly safe.

A couple of problems for Big Five are sales and earnings per share growth. Year over year sales increased only 1 percent while the industry climbed at 2 percent. Earnings per share fell by 1.4 percent for the company, which was better than the industry average of 2.0 percent. But it can be hard to get excited about a 1 percent sales growth. The investor should be asking what the company is going to do or can do to see some sales and earnings growth.

With a strong management team that has a long tenure, the company has managed to maintain a good balance sheet. Debt to equity is 30.0 better than half the industry average of 62.3. Also worth noting: Less than 1 percent is short-term debt and subject to rising interest rates.

The current ratio is 2.17 -- double the industry average of 1.06. However, it should be noted that the quick ratio is only 0.26, versus the industry at 0.36. What this means is that most of Big Five’s liquidity is in accounts receivable and inventory -- not the best form of liquid assets.

Return on equity is acceptable at 12.50, which isn’t bad but the industry is at 19.3. I would like to see a little bit better ROE from Big Five. The net profit margin could also use some improvement as well, coming in at 2.30 -- below the industry at 3.22.

Receivable turnover is very good for the company at 95.9 well above the industry at 39.9 over the last 12 months.

I did notice that inventory turnover is a problem at 2.32 times over the last 12 months compared to the industry at 7.0 times. The inventory climbed 8.1 percent over the last 12 months when sales fell 6.1 percent over the same time period. This is a problem that management has to address and correct before it gets any worse.

Looking forward, we have seven analysts that cover this company and estimate earnings per share out until December 2015. The mean estimate of these earnings per share is $1.25, which is up nicely from December 2014’s estimate of $1.03, a 21.4 percent increase.

Using a multiple of 16.5, the target sell price is $20.63 -- roughly a 72 percent gain. One thing that could stand in the way of Big Five hitting its target sell price is Dicks Sporting Goods Inc. taking some of its business away.

As you read the information on Big Five, you’ll get an idea of what knowing and understanding the business you’re buying means -- it’s not just a company name or your use of its products.

Do you have a question or a company you would like us to take a look at?
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