Are These 3 Stocks a Home Run for Investors?
Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Freshly cut grass, the smell of leather, the roar of the crowd--it must be that time of year again. Baseball is coming back! And while the changing of the seasons may hold a sense of child-like wonderment for some, for companies like Jarden (NYSE: JAH), Nike (NYSE: NKE), and Dick’s Sporting Good (NYSE: DKS), America’s greatest past time smells more like cold hard cash.
So lace up your cleats and follow along as I weigh the potential risks and rewards, in an attempt to determine which companies are investing home runs, and which will go down swinging this season.
Rummage through your garage and I bet you’ll find all sorts of Jarden products such as Bicycle cards, Mr. Coffee java brewers, Coleman grills, Pine Mountain fire starters, and custom designed plastics and zinc -- though admittedly, you’re probably less likely to find custom zinc in your garage. But we’re talking baseball here and with baseball season ahead, Jarden will look to score big with its powerhouse Rawlings.
Jarden acquired Rawlings as a package deal with outdoor company K2 in 2007 for $1.2 billion. As a former collegiate baseball player, I can say confidently that Rawlings gloves are simply the best. However, it’s important to remember that Rawlings is only one cog in the Jarden machine, and the success of Rawlings may not translate directly into overall company growth.
I look at Jarden as a much smaller version of Berkshire Hathaway, the giant conglomerate run by Warren Buffett. More specifically, I view Jarden’s acquisition strategy as similar to Berkshire’s. If we look at Berkshire’s most recent acquisition -- ketchup king Heinz -- it’s easy to see what Buffett and Berkshire value. Heinz is simple, it manufactures a branded product, gets distribution, and people buy it – over, and over, and over again. Jarden has grown over the years by buying its own stable of branded consumer-goods companies.
However, when it comes to sports equipment, there is risk that comes from the dependence on innovation. There has to be research done to provide the safest helmets, the regulations on aluminum bat alloys are constantly changing, and the company has to worry about competitive marketing.
Jarden has also accrued a pretty enormous amount of debt -- over 3 billion as of 2011. This shouldn’t necessarily scare investors off, but it’d be ideal to see a steady trend of cutting down the debt. However, from 2007 to 2011 Jarden has been far from consistent when it comes to reducing that debt load. In fact, looking at the trend over the past few years, Jarden has been adding even more debt.
If there is one thing Jarden is good for, it’s acquiring assets. Since 2007, the company has increased its assets by nearly 30%. This looks to have translated into profits for investors, with Jarden’s EPS of $3.10 at an all-time high. But what’s most appealing about Jarden is the quality and diversity of its product line. With a hand in skiing/snowboarding, camping, and fishing, the company is less likely to be affected by seasonality.
As running great Steve Prefontaine put it: “When you set the pace, you control the race.” And it’s fair to say, Nike has been setting the pace for athletic footwear and apparel for decades.
Nike is a global brand; in fact, 51% of the company’s $20.9 billion in revenue comes from outside of North America -- a trend that has steadily increased since 2007. However, as of recently, trade regulations have been proposed in China, and while it looks like gibberish to me, Nike seems convinced it would be bad news if the legislation is passed.
There are also the normal competitive pressures that the company will have to deal with – it may have the edge on foes like Adidas and Under Armour for now, but it’ll have to keep its game sharp to keep it that way. In addition, there are always the random, one-off risks to consider. The company noted in its annual report that it’s at risk from natural disasters. This isn’t something the average investor takes into account, but after the tsunami in Japan, Nike took a significant hit in that region.
Ask economic theorist Adam Smith what to do about competitors eating into your profits, and he’d probably say “Expand the market!” Nike looks to be doing just that by increasing its global distribution into Brazil, Mexico, Korea, and Argentina. The move has paid dividends, as Nike has -- between 2009 and 2011 -- increased its revenue by 8%. And with the company’s profit margins increasing every year for the past three years, Nike is certainly moving in the right direction.
In no other genre of the market -- in my opinion -- are sponsors more important than athletic apparel. And while it’s hard to argue that anyone has done more to raise the bar for a brand than Michael Jordan, I’m most interested in a couple other Nike sponsored athletes -- Derek Jeter, Albert Pujols, and Mariano Rivera. These are perhaps three of the most celebrated baseball players of my generation. All three are progressing towards equally impressive milestones – Jeter breaking into the top ten in hits all-time, Pujols just 25 dingers off 500, and Rivera as he continues to grow his all-time saves record - and it could make for a very strong marketing campaign.
Dick’s Sporting Goods
Growing up in New Jersey there were two sports stores to choose from -- Modell’s and Sports Authority -- until Dick’s moved in and changed everything. It was bigger, and brighter, and the equipment was just better quality. And if I had any sense at 14, I would have invested right there and then. Dick’s was selling for $15 in 2004--today it fetches $49.07!
Dick’s Sporting Goods and Golf Galaxy -- as of January 2012 -- had 561 stores nationwide. That’s tops in the industry, but begs the question: how much more expanding can they do? Dick’s is currently concentrated in the eastern U.S., so there’s always westward expansion, or even the international market, but expanding internationally seems to be in the distant future. And there is always the prospect of online distributors-- like Amazon.com -- cutting into its market. Dick’s Sporting Goods does have an advantage over online sellers like Amazon -- customers can test out equipment before they buy. However, it’s hard for many customers to cough up an additional 20% to be able to test drive a product.
From a financial standpoint, Dick’s looks dynamic. Over the past three years the company has increased its revenue, net income, and profit margins every year. And when it comes to online distributors -- while I have my concerns -- I’m optimistic. In consumerism, there is this very funny tendency for the average buyer to go out of their way to save 20%... on a big purchase. However, they’re much less likely to do the same for smaller purchases. Rawlings may make the best baseball gloves, but only a small percentage of baseball players wear $300-plus gloves. The lion’s share of the market is high school and under, consumers who are looking to purchase a glove for $100 or less. At that price, a 20% markup looks much less significant, and holding that bat or glove or helmet in your hands can lead to an on-the-spot purchase.
You can’t lose what you don’t put on the table, but you can’t win much either. With that in mind, I’m calling Jarden a home run! While I’m skeptical about the company’s large amount of debt, I really like its brands and acquisition style. Jarden seems to do a good job staying in its “wheelhouse,” acquiring only companies that fit in its niche.
Up next, Nike sends one to souvenir city, for another home run! Nike is the king of athletic shoes and apparel, and I don’t expect that to change anytime soon. Competitors will challenge, but Nike will keep ahead of the pack.
Finally, Dick’s has a number of obstacles to overcome, but I’ll bet on Dick’s sporting good to have continued success this upcoming fiscal year. Consider Dick’s Sporting Goods a home run as well.
Back-to-back-to-back home runs--how about that? I’ll be giving all three companies a thumbs up in my CAPS portfolio, and you can see how it works out for me.
PeoplesInvestor has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!