What are we looking for?
Since Major League Baseball starts this week, the Masters golf tournament next week, and basketball’s March Madness is in full swing, my colleague Rob Belanger and I thought it would be a good time to look at sporting goods companies.
We sorted these firms by market capitalization – minimum $200-million (U.S.) – and all of them had to have a positive return on invested capital.
As with most companies, the price-to-earnings ratio, or P/E, is a key number to watch. We are always looking for a low number.
We also looked at return on invested capital (ROIC). This ratio gives a sense of how well a company is using its assets to generate returns. The better companies show high ROIC ratios.
The debt to capital ratio indicates how much debt the company is carrying compared to its equity. A high number may show weak financial strength. The price to cash flow, or P/CF, is another indication of value and we want a low number.
What did we find?
The lowest P/E on the screen is Fila Korea which owns FootJoy shoes, Scotty Cameron putters, and Titleist golf balls. Bjorn Borg made the company a household name. Foot Locker is second in the P/E value ranking.
Apparel maker Under Armour has the highest three-year average sales growth, followed by adidas AG. Taylor Made golf clubs is owned by adidas, as is Reebok.
Nautilus has the highest return on invested capital, and has no debt. Their exercise bikes are found in many sports arena exercise rooms.
The highest three-year annualized rate of return belongs to Head, makers of skis and tennis racquets, and the company also has a very respectable P/CF.
If we learned anything from the five-month hockey lockout, it is that people will spend money on sports. Bauer, one of North America’s top hockey equipment brands, increased revenue 9 per cent during that time.
According to a recent analyst report by Canaccord Genuity, sporting goods is one of the most reliable retail subsectors. There is a hierarchy of growth however, with clothes ranking No. 1 (active people who once exercised in cotton now insisting on high-tech, sweat-wicking fabrics), followed by footwear, and then team equipment.
As Canaccord points out, the industry also has a defensive side as items need to be replaced every few years. And based on a recent Morningstar report, as well as my own observations, sporting goods companies seem to be hitting their sweet spot.
Major sporting goods companies
|Foot Locker Inc||FL-N||5,059||12.82|
|Fila Korea||081660-S. Korea||593||5.38|
All currencies U.S. Source: Bloomberg, Wickham Investment Counsel
|Foot Locker Inc||FL-N||5,059||12.82||8.44||19.33||5.30||10.45||33.86|
|Fila Korea||081660-S. Korea||593||5.38||6.36||12.46||39.97||54.82||29.3|