At a price of about $5.50 per share, Escalade (ESCA) appears to be a good long-term investment. According to Wikipedia, "Escalade is the act of scaling defensive walls or ramparts with the aid of ladders, and was a prominent feature of siege warfare in medieval times." Escalade offers a special opportunity to investors, similar to the chances (and risks) the original Escalade provided for the attacking armies in the middle ages. The company operates in the sports area and is a maker of sport and recreation equipment, including ping-pong and foosball tables, portable basketball systems, and bows. (It also has an information technology and office solutions division under the Martin Yale brand.) Escalade has a solid balance sheet and its common stock currently trades below book value. Also, many investors fail to realize that the company is a leader in a niche sports equipment area, has the potential to grow significantly in the years ahead, and has two 50% stakes in prominent European companies.
Valuation and Fundamentals
Escalade has 13.4 million shares outstanding for a market capitalization of about $70 million based on recent stock price and an enterprise value of about $85 million. For the nine months ending Oct. 5, 2012, it generated $106.8 million in revenues, an increase of 9% compared to the same period in 2011. During its latest quarter, the company recorded a $13.4 million non-cash goodwill impairment charges related to its smaller print finishing and information technology business. Year to date, Escalade generated $7.3 million cash inflow from operations, or $0.54 per share. Excluding the $13.4 million non-cash charge related to goodwill, for the first nine months of 2012 it earned $4.6 million. Excluding this same charge, Escalade should be able to earn about $6.7 million in 2012 (the fourth quarter is usually among the strongest), or $0.50 per share. At recent prices, the company trades at about 11 times its 2012 earnings (excluding the goodwill impairment charge). In addition, it pays a quarterly dividend of $0.08 for an annualized yield of 5.8%. It will be difficult to find another company growing revenues at 10% a year, paying a 5.8% dividend, and trading at a price to earnings ratio of 11.
The company's valuation and fundamentals, compared to other companies in the sporting goods industry, are also favorable. Let's compare some of Escalade's valuation metrics to that of five other sport and recreation goods manufacturers:
Johnson Outdoors (JOUT): Manufacturer of diving, fishing, paddling, and camping equipment with a market capitalization of $196 million and an enterprise value of $146 million.
Cybex International (CYBI): Maker of gym equipment with a market capitalization of $42 million and an enterprise value of $61 million.
Callaway Golf (ELY): Producer of golf clubs and balls and has a market capitalization of about $480 million and an enterprise value of $527.
Black Diamond (BDE): Manufacturer of equipment for outdoor activities such as climbing, backpacking, and skiing with a market cap of $258 million and an enterprise value of $287 million.
Nautilus (NLS): Developer of fitness equipment with a market capitalization of Z$105 million and an enterprise value of $66 million.
Below is a comparison of some financial measures for Escalade and these five companies:
Sales Growth vs. 1 Year Ago
Price to Sales
Price to Book Value
'13 Price to Earnings (Est.) Ratio
18.5% A Sh.
96.1 B Sh.
Source: Reuters, SEC Filings, and author estimates.
Escalade has a 50% participation in three joint ventures. The value of these joint ventures is carried on the books at $15.1 million, but their value is likely higher due to conservative accounting standards. During the first nine months of the year, these joint ventures generated $1.3 million of income to Escalade. Two of these joint ventures are in Europe and one is in Taiwan. It is reasonable to expect that as the European economy recovers in the second half of 2013 (according to Mario Draghi's recent statement), the value of these joint ventures will increase. The following is a brief description of each joint venture:
Stiga Sports AB: Stiga is based in Sweden and is a leading maker of table tennis and other sports and games equipment.
Escalade International: Escalade International operates out of the United Kingdom and is a wholesaler of table tennis, archery and other sports and gaming equipment.
Neoteric Industries: Taiwan based company with limited operations and is a joint venture with Escalade's information technology and office solutions division, Martin Yale.
Escalade is a company that operates in a niche areas -- sports and games that people of all ages and genders play on a regular basis. The company faces little or no competition from new technology and it has over 20 brands. The Martin Yale brand is losing money and, as I suggested earlier, the company and its shareholders will be better off if Martin Yale is disposed of. A major maker of games, Nintendo (NTDOF.PK), saw its shares decline over 80% in the past five years, mostly due to competition from Apple (AAPL). Escalade does not seem threatened by iPads and other tablets, as consumers will always prefer to shoot a real bow or play table tennis against a real opponent. At a price of under $6 per share, Escalade seems like a true bargain.