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Big Five Sporting Goods: A Stunning Turn Of Events For This Micro Cap In The Third Quarter

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About: Big 5 Sporting Goods Corporation (BGFV)
by: Lukas Wolgram
Lukas Wolgram
Long/short equity, growth at reasonable price, small-cap, mid-cap
Summary

Big Five Sporting Goods posted an impressive third quarter.

I was previously bearish on the company, but this quarter provides compelling evidence that a turn around could be occurring.

This stock could turn out to be a great value play.

Introduction

Big Five Sporting Goods (BGFV) reported stellar earnings in Q3 posting an impressive 100% increase in EPS on a slight revenue decline over the same quarter 1 year ago. The company is showing signs of a turnaround posting the largest margins in a long time and the fourth consecutive quarter of same-store sales growth. The current stock valuation is very low if a turnaround is indeed occurring, but it remains to be seen whether this momentum is temporary or sustainable for the long term.

Source: Big Five Website

Short After Q2, Flip Long After Q3?

I was extremely bearish on this company after Q2 (admittedly far too bearish), as the company continued to barely post a profit on a modest sales increase in that quarter. In fact, I went so far as to say the stock was a solid short. I shorted shares after Q2 in the $2.30s and covered them for a modest 10% gain after Q2, although the stock continued to fall significantly further before bottoming out near $1.70.

Over the course of the next few months, the stock remained volatile, trading between $1.70 and $2.50, but ultimately rising as the market digested Q2's debatable results.

ChartData by YCharts

The company reported Q3 2019 earnings on October 29, 2019. Needless to say, the earnings beat my expectations and management's own guidance, doubling EPS over last year. They also posted 0.3% same-store sales growth despite overall revenue falling 0.06%. The company's continued relocation and store closure efforts are paying off. Net income more than doubled while EPS came in at $0.30 compared to $0.15 in Q3 2018. Year to date earnings are up significantly over last year as well.

Management guided for EPS to be negative in the fourth quarter on the conference call with a loss of between -$0.04 and -$0.16 with slightly positive same-store sales. They're expecting $0.22 to $0.34 in EPS for the full 2019 year.

The stock opened well over 30% higher on October 30 after the earnings report and hit an intraday high of $3.95 but ultimately couldn't hold it. The stock closed near $3.50 on October 30 and subsequently declined back to the pre Q3 earnings range over the next few weeks. As of the time of writing this article the stock is trading at $2.77. So the question remains, is this a reasonable price per share?

Valuation

Big Five has a book value of $180.6M, but with shares trading at $2.77 and 21.671M shares outstanding, the company only has a market cap of $60M. This means the company is trading at a price to book ratio of just 0.332. On an absolute basis, this is very cheap. A 1.0 price to book multiple would put shares at $8.34, a 201% increase from the current price.

ChartData by YCharts

The market appears to be nervous about the 4th quarter earnings, and thus is pricing shares near 8 and 13 times management's guided 2019 earnings. For a company with little to no growth in earnings, this might be a reasonable multiple, but would be extremely cheap for a company growing EPS. Thus if investors feel earnings will increase again next year for Big Five, the shares are likely underpriced. The market is essentially still pricing no increase in earnings going forward.

Conclusion

Ultimately I'm not ready to buy this company. There are two reasons for this. First, I am not a pure value investor. I am a growth at a reasonable price investor. I prefer to see strong revenue growth with strong earnings growth. Two, I cannot identify a meaningful competitive advantage for Big Five over other sporting goods retailers, which is a big requirement for my personal investing strategy. The lack of a competitive advantage prevents me from buying shares of this company as it causes me to question how sustainable this turnaround is.

That said, value investors may find Big Five to be a very profitable endeavor if the company can keep the positive earnings momentum going into early to mid 2020. The company is now showing that bankruptcy is far from imminent, with positive operating cash flow of $13 million in Q3 and a big earnings increase year over year. Big Five Sporting Goods has made well over $0.60 in EPS in several years over the last decade (EPS got as high as $1.28 in 2013) on similar revenue numbers to today. If the company is able to return to these earnings numbers the stock will certainly increase from here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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