In an environment where many brand-name initial public offerings rocket like Maurice Richard, investors have a curious opportunity: buying shares in Bauer Performance Sports Ltd. at a roughly 20-per-cent discount to its IPO price of just over two months ago.
Many investors have taken a look at the mature market for hockey equipment, Bauer's primary line of business, and decided the company can't possibly deliver the long-term growth that would drive its valuation. Those who take a closer look at Bauer and buy into the company's growth theory, however, may take the stock – dare we say it – out of the penalty box.
Bauer, once a family-owned company, has become nearly synonymous with hockey since its 1927 founding in Kitchener, Ont. The company estimates about 90 per cent of NHL players use at least one Bauer product.
Analysts believe the company has a 45-per-cent share of the global equipment market of about $550-million, making it larger than the next three biggest players combined. It's No. 1 in skates, helmets, protective gear and goalie equipment, and a close No. 2 to Easton in sticks.
Alas, where does the company go from here? The hockey equipment market is growing at just 1 per cent to 2 per cent a year, RBC Dominion Securities analyst Tal Woolley says. The number of registered hockey players in Canada between the ages of five and 25 is expected to shrink by 30,000 players, or 5 per cent of the total, in the next five years, according to CIBC World Markets Inc. analyst Mark Petrie.
Bauer's response is fourfold. One is a push into sports like lacrosse – not too far afield from its core competency.
Another is tapping a faster-growing but underdeveloped hockey market like Russia.
A third is a bigger push into apparel, in which Bauer has a single-digit market share.
Fourth, and most challenging, is continuing an aggressive expansion of market share in its core hockey business.
The lacrosse market, which Bauer entered in June, 2010, with a $14-million deal to buy the Maverik brand, presents an interesting growth opportunity. Mr. Petrie says the sport posted a compound annual growth rate of 10.6 per cent in the United States from 2001 to 2009 and now numbers 570,000 players – the same number of registered hockey players in Canada.
He estimates lacrosse products deliver less than 2 per cent of Bauer's $200-million-plus in annual revenue, but the growing market and the company's aggressive push suggest 20 per cent to 30 per cent annual gains in the business.
While Canada – Bauer's biggest geographic market – is mature, Russia offers annual growth potential of 5 per cent or more in the number of participants, RBC's Mr. Woolley says.
Bauer's 15 per cent of revenue from sales of hockey apparel (team sweaters, bags, lifestyle wear and so on) is just 5 per cent of the overall market; it's shut out of the $120-million licensed-apparel business until at least 2016, due to the NHL's exclusive deal with Reebok. Mr. Woolley says Bauer "intends to steal" the deal at renewal time, and "has already hired away talent from Reebok to help ready its bid."
Scoring With Hockey
In the interim, Bauer can best move the needle by continuing to grab an even bigger share of the hockey equipment market. Bauer had just 28 per cent of the hockey market in 2006; it zoomed to 45 per cent by focusing on the Bauer brand, boosting R&D spending, and executing better.
An example: the Supreme TotalONE skate, launched last April, is 15 per cent to 20 per cent lighter than a traditionally made skate, Mr. Woolley says. Use of Bauer's "Supreme" branded skates nearly doubled in the NHL, and "better yet, product costs were reduced by 10 per cent and retail prices were increased by 25 per cent," he notes.
Here's what investors need to know about how these projections add up. Mr. Petrie expects annual revenue growth in the high single digits in the next four to five years, one-third from lacrosse and apparel and two-thirds from hockey. The hockey growth assumes a climb in market share from 45 per cent to 56 per cent in the year ending in May of 2014.
Mr. Woolley thinks Bauer could more than double its earnings per share from IPO levels within five years – but that requires a five-percentage-point gain in its share of the hockey market, a 25-percentage-point share gain in lacrosse, a doubling of apparel sales to $30-million, and winning the NHL licence contract.
In the meantime, however, taking next year's earnings forecasts from the two analysts, and putting a modest multiple of 12 on them, yields a share price around $9 – a gain of about 50 per cent from current levels. Bauer doesn't have to win every game for investors to profit.