Recreational Sports For Your Portfolio

This week’s hot stock was a new addition to our Most Attractive Stocks List in March and earns our Very Attractive rating. This company has strong fundamentals and its stock is attractively valued. After divesting a portion of its business in 2014, this company is focused on growing its core operations and continuing the success it has already achieved. If you’ve ever competed in a game of ping-pong, pool, darts, or even archery, you’ve most likely used this company’s products. After a rollercoaster 2014 for this stock, which ended the year up 28%, shares could be poised for even further price appreciation in 2015 and beyond. This week’s hot stock is Escalade Inc. (ESCA)

Escalade manufactures and sells various sporting goods products, ranging from basketball goals and archery products to billiard accessories and ping-pong tables. This vast array of products gives Escalade a hand in many different niche markets. Prior to 2014, Escalade also operated in the Information and Print Finishing industry, but divested those business lines throughout 2014. These two product lines only made up 14% of revenues in 2014, and removing them allows Escalade to focus on one industry rather than spread across three non-related segments.

Escalade has grown after-tax profit (NOPAT) by a very impressive 55% compounded annually since 2009. Despite revenue in 2014 declining, mainly due to the divestiture of business segments, Escalade’s NOPAT was still up 10% year over year in 2014. The company has increased its return on invested capital (ROIC) from 1% in 2009, to 10% in 2014, a sign that it is effectively managing assets to grow the business.

Despite its positive 2014, ESCA remains undervalued and not priced as the growing company it is. At its current price of ~$17/share, Escalade has a price to economic book value (PEBV) ratio of 1.0. This ratio implies that the market expects Escalade’s NOPAT to never meaningfully grow from its current levels. Given the growth seen in the past five years, along with the improved focus on its core business segment, this expectation seems out of touch with reality.

If Escalade can grow NOPAT by just 8% compounded annually for the next 10 years, the stock is worth $26/share –– a 53% upside. If Escalade can continue growing NOPAT anywhere near the past five years the upside will be even more profitable.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

 Photo Credit: Jordi Sanchez Teruel (Flickr)

    1 Response to "Give This Sporting Goods Stock Some Play in Your Portfolio"

    • Graham

      Growth in NOPAT will depend on how much of the earnings stream is retained and the corresponding ROIC going forward. Unless ALL earnings are retained then some growth MUST occur for the company to trade at book value.

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