Big Five Sporting Goods is a stock I used to follow in a previous life as a buy side analyst. On top of meetings with management I visited their very impressive state of the art distribution center. This kind of due diligence work can help prevent the small chance of a fraudulent company, or help you preemptively find those "something's not right" moments. However, this company seems rock solid and one that I am looking at from a longer term fundamental buy position.
I have done some deeper analysis, but attached I have 4 simple summaries of how to value a company fundamentally. The first picture shows the financials of the past year and a half and some simple valuation metrics in the bottom.
As can be seen, the company creates around $0.45 per share in free cash flow, which theoretically could all be paid out to shareholders as dividends. Another valuation metric is Price to book value. Anything that is 1 or below means that the company is currently valued at its liquidation price...so if the company had to liquidate everything in a desperate moment, this is likely the price it would get. However, this is rare and typically a worse case scenario valuation. Most companies trade above 1.0 book value.
The next excel screenshot shows what the company could be worth to a private equity company or other buyer. Typically public companies cost more because of the public "premium" that the markets create. Assuming a 7.0x EBITDA valuation is likely conservative.
The next photo shows a simple discounted cash flow model with a Gross PP&E terminal value discounted to today's assumed price. One scenario assumes zero growth and the other assumes a 10% growth. Typically DCF models are conservative in that they assume a longer time horizon for an event to occur, which makes the discounted value of that event worth less (in this case a 10 year horizon generating only $3.42 in current value - note that if the event was moved up to year 5 then the terminal value would create $6.00 of present value). I have assumed a 12% discount rate which is likely conservative given the current market and low interest rate environment.
Averaging all of these valuation methods together, comes up with an $11.10 price which is significantly higher than the current $6.88 price. Alternatively, the lowest and most conservative valuation yields a $5.96 price which should provide a decent floor for the stock price.
The risks include the Free Cash Flow falling and/or the values of PP&E and Inventory on the books are overstated. However, The conservative case takes most of this into account by assuming no FCF growth in the next 10 years as well as an event that doesn't occur for another 10 years.
My experience with Big Five, its ownership, and management are the intangibles that add peace of mind to my thesis that Big Five Sporting Goods is likely undervalued at these prices and constitutes a "buy".
Good Luck
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