Performance Sports didn’t

Performance Sports Group reported dreadful results in the third quarter of fiscal 2016. This has reduced its quality rating by one notch. It carries heavy debt. But it’s building its cyclical consumer goods business and should do better in upcoming fiscal 2017. In the meantime, we’ve downgraded this sports equipment manufacturing stock to a ‘hold’.

We regularly review U.S.-based consumer goods stock Performance Sports Group (TSX─PSG; NYSE─PSG) in our household goods stocks survey. Since early January its shares have plummeted by over 68 per cent. The company faces some negative developments. On the positive side, it’s building its business. On balance, we’ve downgraded PSG to a ‘Hold’. But only if you need no dividends and you can accept owning a stock we now rate ‘Higher Risk’.

PSG develops and manufactures ice hockey, roller hockey, lacrosse, and baseball and softball sports equipment. It also develops related apparel as well as soccer apparel. The company bills itself “the global leader in hockey with the strongest and most recognized brand, and it holds the No. 1 North American position in baseball and softball”. PSG’s brands include Bauer, Mission, Maverik, Cascade, Inaria, Combat and Easton. Sales representatives and independent distributors sell its products worldwide. The company is “focused on building its leadership position by growing market share in all product categories and pursuing strategic acquisitions”.

Sporting goods manufacturer had terrible performance

In the three months to February 29, PSG reported terrible results. In the third quarter of fiscal 2016, it lost $188 million, or $4.13 a share. All numbers are in U.S. dollars unless preceded by a C. This was far worse than a loss of $12.5 million, or 28 cents a share, a year earlier. The company reported a non-cash impairment charge of $145 million this year.

PSG’s adjusted third-quarter results were a much more moderate loss of $14.8 million, or 32 cents a share. This was still worse than an adjusted loss of $5.6 million, or 12 cents a share, in the seasonally weak third quarter, a year earlier.

Poor sales, weakened customer finances

PSG is facing poor sales and weakened customer finances. Interim chief executive officer Amir Rosenthal said: “The baseball/softball market is experiencing an unexpected and significant downturn in retail sales, across all product categories, particularly in our important bat category. This downturn was in addition to the [bankruptcy] by one of the largest U.S. national sporting goods retailers.” Fortunately, sales in the hockey and lacrosse business are strong. This has helped to offset the poor baseball results.

Following the loss, PSG’s assets after deducting goodwill fell to $651 million. This gives it an initial quality rating of ‘Average’. But since it’s a manufacturing stock and serves potentially volatile markets, we give it a level-two quality rating of ‘Higher Risk’.

PSG continues to build its consumer goods businesses. On January 13, for instance, it acquired Easton Hockey. On February 2, the company launched Easton baseball products in Japan. PSG estimates that the size of Japan’s baseball equipment market is $400 million.

PSG’s price-to-earnings ratio will improve

In fiscal 2016, PSG is expected to earn C$0.23 a share. That’s down sharply from earnings of C$1.46 a share last year. Based on this year’s estimate, the shares trade at a high price-to-earnings, or P/E, ratio of 19.4 times. Fiscal 2017 starts June 1. Next year, the company is expected to earn C$0.96 a share. This gives the shares an attractive P/E ratio of 4.6 times.

PSG’s debt is high

PSG has high debt. Its net debt-to-cash-flow ratio is a very high 30.8 times. This is far above our comfort zone of two times or less. Similarly, its net debt-to-equity ratio was an excessive 4.19 to one.

On January 27, PSG put in place plans to improve its profits and to wring more working capital out of its operations. It expects this to cut debt by $40 million in the year to May 31.

Keep in mind, too, that PSG’s earnings will partly recover next year. This should raise its cash flow, which, in turn, will make its net debt-to-cash-flow ratio more manageable.

 

The Investment Reporter, MPL Communications Inc.
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