21 Jun The Lato Letter: Volume 1, Issue 19.
Following my appearance on Market Call Tonight, the following are summaries of the three “Top Picks” from last night’s show. If you missed the show, check the Library section of the Padlock website for the links to the show.
Bauer Performance Sports, $8.15
In its previous incarnation as a public company, Bauer Performance Sports was known as Canstar Sports. Canstar was acquired by Nike in 1995 and sold to a group led by the private equity firm, Kohlberg, Kravis & Roberts (KKR) in 2008. In March 2011, Bauer once again became a public company as the group sold approximately 33% of the company to the public.
Bauer is the leading hockey equipment company in the world with 39% of its sales in Canada, 36% in the United States and 25% in the rest of the world. The recent Stanley Cup victory by the Los Angeles Kings will certainly aid Bauer’s presence in growing a potentially more important market.
Bauer is also a major supplier to the lacrosse market, one of the fastest growing sports markets in North America. In fact, Bauer recently completed a share issue to fund the purchase of Cascade Helmets, the leading supplier of lacrosse helmets. As a sign of support and recognition of good value, KKR participated in the issue to minimize a dilution of their holding in this great brand name company.
For the fiscal year that just ended on May 31st, analysts expect Bauer to earn 75 cents per share with that estimate growing to 85 cents a share for May 31, 2013. At a P/E multiple of less than 10 times next year’s earnings, Bauer represents great value.
Cirrus Logic, $30.31
Cirrus Logic was established in 1984 and has developed over 1000 patents contained within its high-precision analog and digital signal processing components for the audio and energy markets. Its energy related products are used in power meters, which should be an excellent growth industry with the increasing “smartness” of the electricity grid.
The major growth driver over the last few years and beyond is the audio side of the business where the company’s products are found in the full range of Apple products. In fact, Apple accounts for almost 70% of Cirrus’ sales in the last twelve months. While acknowledging that having 70% of your sales coming from one customer increases your business risk, the fact that Apple is your customer helps to mitigate that risk as their volumes continue to grow.
In their latest earnings release, Cirrus announced that they had completed a $100 million revolver loan (a revolver loan allows a company to access funds as needed up to the maximum amount) to finance an expected increase in sales later this year. It is expected that the increased volumes will come from the inclusion of a Cirrus sound chip in the soon to be released iPhone 5. This increase in volume will help the company realize the analysts’ estimates of 25% annual earnings growth over the next two years. At a P/E of under 14 times March 2014 earnings, the risk of a dominant customer is factored into the price allowing for a solid return if the earnings targets are met without an increase in the P/E multiple.
Not much has changed since I featured the company last month. The price of natural gas has continued to be soft causing some of the higher cost producers to slow their exploration programs. As a very low cost producer, Tourmaline has continued to grow while operating with a disciplined exploration budget.
With lower levels of natural gas exploration the pendulum of the supply/demand balance will someday start to swing the other way and reward the strong industry survivors. The good news is that we are now one month closer to that pendulum swinging positively for Tourmaline than we were a month ago. For more on Tourmaline, I refer you to Issue #14 of The Lato Letter, further below in this Blog.
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