Academy Sports and Outdoors Inc. (ASO, Financial) is a good undervalued business, according to Quo Vadis Capital founder and President John Zolidis:
"We believe ASO is materially mis-modeled, both on a near-term basis, but also over the long term (next few years) setting up a significant upward revision event or events which should propel the shares higher. Using our estimates (which have been updated based on recent filings and discussion with the company), we forecast ASO reaching more than $4 per share in both EPS and FCF by FY23."
Applying a modest price-earnings ratio of 12 or 6 times enterprise value/ Ebitda, Zolidis sees the shares in the $45 to $48 range over the next several years, a 100% to 113% upside over last Friday's closing price of $22.46.
That's huge upside potential. What did Zolidis see that the market has been missing? Several things.
One of them is the "botching" of the company's shares during the initial public offering by the bankers, who reduced the original offering price from $15 to $17 per share range to $13, with the stock opening at $12.
"We can't say what exactly the bankers did wrong (it doesn't matter), but we're pretty sure IPOs are supposed to go up after a listing," Zolidis said.
Then there's the issue of lack of investor awareness, as the company has little analyst coverage. This means the "efficiency hypothesis theory" has yet to apply to the stock's valuation.
Additionally, several positive catalysts could improve the company's visibility. Like the earnings release by other sporting goods retailers, notably Dick's Sporting goods (DKS, Financial), Foot Locker (FL, Financial), Hibbett Sports (HIBB, Financial) and Big 5 Sporting Goods (BGFV, Financial).
"We believe these companies will report strong results, which will draw attention to space and to ASO, which will be the last company to report in the group," Zolidis added.
The problem is that these peers have not created any value for their shareholders lately, as their economic profit is negative. This means the retailer could suffer the same fate since growing competition puts pressure on its return on invested capital.
| Company | ROIC | WACC | Economic Profit (ROIC-WACC) |
| ASO | 10.74% | 5.74% | 5.00% |
| DKS | 7.89% | 9.47% | -1.58% |
| FL | 5.51% | 6.67% | -3.96% |
Source: Compiled from Gurufocus on Jan. 25, 2021
Meanwhile, investors should take Zolidis' bullish estimates for Academy's shares with skepticism for a couple of reasons. One of them is that the company has a short history in the public space, so there isn't enough public financial data to apply the discounted cash flow model to estimate its intrinsic value.
Then there's the Covid-19 pandemic and the lockdowns, which has forced people to exercise at home rather than at the gym, which has boosted demand for exercise equipment. It has also boosted demand for outdoor equipment, as people had the money and the time to improve their homes.
According to NPD retail data, health and fitness equipment sales more than doubled to $2.3 billion for the March through October period. Sales of treadmills surged 135%, while those of stationary bikes nearly tripled.
This kind of spending is expected to dissipate and eventually decline once the Covid-19 pandemic is over and people return to the local gym.
If that turns out to be the case, Academy's shares may turn out not be as mispriced as they look.
Disclosure: No positions.
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