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Bauer is expanding into lacrosse, the fastest growing sport in the U.S., High school lacrosse thinkstock

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Bauer Performance Sports, the hockey equipment purveyor, has many fans at the rink. But on the stock market, it's a different story, and that suggests an intriguing investment opportunity based on Canada's national game.

Bauer trades at a big discount to the valuation of other sports and apparel companies. It isn't often that the market offers up the opportunity to purchase a top brand in any consumer product business at a hugely discounted multiple to peers.

CIBC World Markets analyst Mark Petrie recently compared the price-to-earnings multiple of Bauer to competitors. For investors, a lower number is usually better because it suggests a stock's earnings are inexpensively priced. This year's estimated P/E multiple for Bauer is 9.9 times, compared to 17.3 times for other companies making sports equipment and apparel.

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The simplest way of viewing the P/E figures is that it would take Bauer investors 9.9 years to earn the current share price through profits at this year's rate. For competitors, it would be more than 17 years.

There isn't a good reason why Bauer should be trading as if it were damaged goods. In fact, Bauer's prospects seem excellent. It dominates, with a 49 per cent market share, in ice hockey equipment, its major business line, and continues to expand market share at the expense of rivals. The company is also active in lacrosse, performance apparel, and roller hockey, where it has an even more overwhelming 55 per cent share of the market.

"The most important fact for investors is that the company is consistently taking market share in its core ice hockey business," Mr. Petrie said in a recent note to clients.

Bauer has managed to win in the hockey business even though it's in a David and Goliath contest with Reebok, a unit of German-based sportswear giant Adidas. Bauer itself used to be owned by Adidas' arch sports footwear rival Nike, but is currently controlled by private equity firm Kohlberg & Co.

"We like Bauer because they're the dominant hockey equipment supplier in the world," says Martin Braun, president of Adaly Investment Management, a money manager that has taken a positi on. "Everybody knows the Bauer brand."

Mr. Braun has done some research on the value of Bauer and found those purchasing it at current levels are able to buy in at a cheaper price than Nike did, when it took control of the company back in the mid 1990s "and it's a better company today than it was in 1995."

Although Bauer dominates hockey, it is seeking a second niche in lacrosse, which is the fastest growing sport in U.S. schools, as measured by percentage changes in number of players. Earlier in June, Bauer bought Cascade, the top maker of helmets and eye wear, expanding its existing lacrosse operation.

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The company's partial funding of the acquisition through the issuance of new common shares is stoking bullish sentiment because Kohlberg picked up more stock in the secondary offering, priced at $7.80 a share. Normally private equity firms unload stock at every opportunity, but Kohlberg picked up 600,000 at a price slightly above last year's initial public offering of $7.50. The purchase suggests that Kohlberg, as a presumably savvy insider, figures the stock is undervalued.

"To the extent that investors expected Kohlberg to be moving in the other direction, this should come as an encouraging surprise. We continue to believe that Kohlberg will exit its position over time, but they are clearly in no rush, and are happy holders at the current time," Mr. Petrie noted.

Bauer might suffer if there is a recession, but Mr. Braun says the company has more resiliency to a downturn than most businesses because hockey has become a sport of the relatively well heeled middle class in Canada, a group that will likely continue to buy equipment for their children in a slump.

Even though hockey mad Canada may be a mature market, Bauer is expanding in Russia and Eastern Europe, potential growth markets.

The Canadian stock market has recently been weak, but Bauer has been bucking the trend, suggesting that investors are accumulating the shares.

"This market has been very weak lately and this stock hasn't gone down an inch, not at all," observed Mr. Braun.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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