Think ice hockey and you think Bauer Performance Sports Ltd. , which dominates the ice from the goal crease to the centre line. But think about investing in an athletic gear company and chances are you won't think Bauer, judging from the pervasive lack of interest in the company's shares.
After changing hands a few times throughout its lifespan, Bauer listed its stock this year. The shares promptly shed 15 per cent of their value. I own some, and before I invested I ran the company through a series of questions inspired by Warren Buffett's approach to investing.
Is the business easy to understand? Yes. Bauer primarily makes hockey equipment such as skates, helmets, goalie pads, etc. It also makes roller hockey and lacrosse gear, as well as apparel.
Does the business have a consistent operating history? Yes. Bauer was established in 1927 and has essentially been producing the same products ever since.
Is management rational with capital? Because Bauer has been public only a short while, it's difficult to answer this question. Since it was the subject of a leveraged buyout, excess capital is earmarked for debt repayment for now.
Is management candid with shareholders? Again, difficult to answer at this early period in the company's public life. However, I spoke at length with CEO Kevin Davis and based on that limited experience I would say yes.
Does management resist the "institutional imperative"? There's no evidence of empire building, silly acquisitions or blindly imitating competitors. On the contrary, management appears highly focused on executing and gaining market share. Bauer has made small bolt-on acquisitions of ice hockey, roller hockey and lacrosse brands, all of which seem to be working out.
Is the focus on producing a good return on equity? Yes. In fact, it has to be given the ownership and capital structures. Debt is relatively high and the private equity firm Kohlberg & Co. still owns a significant stake, which it hopes to unload at higher prices. Deleveraging through cash generation is the goal.
Are profit margins high? Yes. Profit before interest and taxes was 25 per cent in the latest quarter. And under a different capital structure – one with less debt – Bauer's net income would be higher.
Has the company produced at least $1 of market value for every dollar of income retained? This is a gauge of management and the board's capital allocation. It's impossible to say in this case because of the various changes to Bauer's ownership.
What is the value of the business? If Bauer can generate free cash flow of about 85 cents (U.S.) a share in its next fiscal year it's easy to argue that the business will be worth $12 a share in a couple of years.
Can it be purchased at a significant discount to value? If the valuation estimate above is right, then shares are trading well below their intrinsic value.
In short, Bauer is a quality company with a durable competitive advantage changing hands for less than it's worth. One example of its name value came during Nike's ownership of the company: it co-branded the equipment Nike Bauer, so powerful is the Bauer name, even compared to Nike.
Bauer's other advantage is an entrepreneurial business culture. The company has eight distinct units, each working as a semi-autonomous firm within a firm, which makes it highly responsive to customers.
Bauer's valuation is hurt by a lack of liquidity and a relatively high debt load. Both should improve over time. The rewards from an investment, in my view, more than adequately compensate for the risk.