Is Performance Sports Group Ltd. the Hidden Gem of the Retail Industry?

Performance Sports Group Ltd.’s (TSX:PSG)(NYSE:PSG) stock fell over 3% after it released better-than-expected third-quarter earnings results. Should you be a long-term buyer?

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The Motley Fool

Performance Sports Group Ltd. (TSX:PSG)(NYSE:PSG), one of the world’s leading retailers of sporting apparel, equipment, and accessories, announced record third-quarter earnings results after the market closed on April 13, but its stock responded by falling over 3% in the trading session that followed. Let’s take a closer look at the quarterly results to determine if this weakness represents a long-term buying opportunity.

The record-setting results

Here’s a summary of PSG’s third-quarter earnings results compared to what analysts had anticipated and its results in the same quarter a year ago. All figures are in U.S. dollars.

Metric Reported Expected Year-Ago
Earnings Per Share $0.13 $0.10 ($0.11)
Revenue $137.75 million $137.12 million $62.20 million

Source: Financial Times

In the third quarter of fiscal 2015, PSG reported an adjusted net profit of $6.2 million, or $0.13 per share, compared to an adjusted net loss of $4.2 million, or $0.11 per share, in the year-ago period, as its revenue increased 121.5% to $137.75 million. These very strong results can be primarily attributed to the company’s $330 million acquisition of Easton’s baseball and softball business, which closed in April 2014 and led to revenues increasing 2,379.3% to $71.9 million in its baseball & softball operating segment.

Here’s a quick breakdown of eight other notable statistics and updates from the report compared to the year-ago period:

  1. Revenues increased 9.3% to $53.9 million in its hockey segment
  2. Revenues increased 19% to $11.9 million in its other sports segment
  3. Adjusted gross profit increased 133.8% to $46.3 million
  4. Adjusted gross margin expanded 180 basis points to 33.6%
  5. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at a profit of $14.4 million compared to a loss of $3 million in the year-ago period
  6. Operating income came in at a profit of $2.52 million compared to a loss of $10.42 million in the year-ago period
  7. Total assets increased 4.6% to $858.34 million
  8. Total debt increased 229.7% to $431.2 million, which reflects the company’s financing of the Easton acquisition

Does Performance Sports Group belong in your portfolio?

I do not think the post-earnings drop in PSG’s stock was warranted and actually represents a very attractive long-term buying opportunity. I think this because the stock trades at very inexpensive valuations, including just 22 times fiscal 2015’s estimated earnings per share of $1.09 and only 19.2 times fiscal 2016’s estimated earnings per share of $1.25, both of which are very inexpensive compared to its long-term growth potential.

I think the company’s stock could consistently command a fair multiple of at least 25, which would place its shares upwards of $27 by the conclusion of fiscal 2015 and upwards of $31 by the conclusion of fiscal 2016, representing upside of more than 12% and 29%, respectively, from current levels.

With all of the information provided above in mind, I think Performance Sports Group represents one of the best long-term investment opportunities in the retail industry today. Foolish investors should take a closer look and strongly consider establishing positions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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