Sports Supply Group – RBI
Market Cap: $150m
Sales: $250 (0.57x sales)
2008 EPS = $0.76, 2009 EPS = $0.86, 2010 guidance $0.91-$1.00
We think a $1.5 to $2.5B market is about to be consolidated by either RBI. If not by RBI, then by a Private Equity Firm, buying RBI. That’s right Private Equity WILL BUY SPORTS SUPPLY GROUP.
After integrating its largest competitor in 2006-2007, RBI has slowly (below the radar) built a world class group of field salesman and back end systems for order management. The company has streamlined its inventory and catalogue and is poised to grow in 2010 and 2011. We believe the street, only two analysts, are behind the curve in terms of revenue opportunities. The street has modeled 7% growth for 2010; the company has announced 3 acquisitions and 4 partnerships in the last 2 months that are worth $10-$15m in sales in our opinion, which we think should be accretive to the 7% number. We expect 8-10% growth.
The company just paid off its convert in December 09, and now has full access to the $50m LOC which was restricted until 12/09. This is important as they now have access to capital at 2.5% vs. paying interest at 5.5%. We would also point out that over the last 2 years, the company has paid off $45m in debt. To put this greater perspective, in 2007 the stock was $12 per share, had 15m shares and $45m in debt. Today, at $12, the company has 12.5m share and roughly zero debt. Companies talk about shareholder wealth creation, RBI does it. (We suggest you read that again, this is what companies are supposed to do). At some point, RBI will take off like a rocket.
So why hasn’t this company been found and why will PE buy it? RBI sells sporting equipment through a field sales force, catalogue, and internet to schools (K-12), Universities, and Park & Rec. NOT SEXY at all. What is sexy is that of the $1.5-$2.5b market, RBI does $250m, making it the largest player. Being the largest player allows RBI to invest in real back office systems, Oracle, etc, to streamline and grow. This means, RBI is the only company large enough to leverage off of. (Now start to see the PE relationship here). To be clear, Leonard Green purchased Varsity.com and they are the largest supplier of cheerleading equipment. This industry is ripe for the consolidation, and RBI is what PE would buy.
In the mean time, why buy RBI.
Competition: It’s mom and pop competitors are dying in the current environment. Yes we know lots of companies say this, but last quarter, 3 of RBI’s competitors, handed over their businesses, $2-$3m in sales each, to RBI for what we believe to be 2-3 year employment contract. (as they paid roughly ZERO for them, we are guessing here). So yes, it’s that bad for most competitors our there, and that good for RBI, and trusts us, there’s more to come.
New contracts: RBI has, per the last seeking alpha contributor pointed out, been successful in winning a large government contract for K-12 to fight Obesity. While the contract is a win, the last provider only provided a small sampling of the total contract. In a few years time this should turn into a $15m contract, or more.
Margins: The company has continued to increase both its GM’s and Operating margins y/y for the last 2.5 years. There is a cap to GM’s of course, but the company is still 2.5% to 3% away from its goal in direct sales, and 4-5% away from its goal on field sales.
Not only will RBI grow revenues, but we can see a 10% Operating margin in 2-3 years on $300m in revenues.
MOMENT of TRUTH: “WHY SHOULD I BUY THIS TODAY”
1. RBI has met or exceeded guidance 5 quarters in a row. At some point this will matter.
2. FREE CASH FLOW. On a projected $1 in EPS, or $12.5m net income, RBI should generate roughly $15-$18m in Cash flow. That’s $1.20-$1.44 per share.
3. 2-3 year outlook. We see this company as a $300m top line company with 10% Op margins. On a 40% tax rate that’s $1.45 per share in EPS and $1.75 in CASH EPS. (That’s also roughly $40m of cash added on to the balance sheet or $3.20 worth of cash or 26% of the current market cap.) At that rate, in 7.5 years, the cash will equal the market cap, and you’d get the company for FREE. This really is something to think about.
RBI is well run (this is a Business to own not just a stock to rent), extremely cheap, poised to enter a growth phase, and has a Private Equity Bulls-Eye on its back to backstop the stock price.
Risk: Very Low trading volume.
Author is Long
Disclosure: Author is LONG