IS Big 5 Sporting Goods Suitable for the Enterprising Investor?

The company meets all of Benjamin Graham's criteria

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Aug 25, 2017
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This is the third in a series of articles on appealing stocks according to Benjamin Graham's enterprising investor screen.Â

The enterprising investor screen is one of several investment checklists Graham compiled toward the end of his life and career to help simplify and refine the investment process for investors seeking value.

Not as strict as other value checklists, the enterprising investor screen was not designed to be a tool for finding deep-value stocks, but to help investors find out-of-favor companies trading at a deep discount, with strong balance sheets and the potential for steady returns.

The eight criteria of the enterprising investor screen are as follows:

  1. The stock must be trading at a price-earnings (P/E) of less than 10.
  2. The company must have a current ratio (current total assets divided by total current liabilities) greater than 1.5. This is designed to screen for companies with strong balance sheets.
  3. Long-term debt < 1.1 times working capital. Once again, a test of balance sheet strength.
  4. Profitability: the company must have reported positive earnings per share for the past five years or more.
  5. Has the company paid a dividend in the past five years?
  6. Are earnings per share greater than they were five years ago?
  7. Is the company trading at a price to tangible book ratio of less than 1.2?
  8. Does the company have its primary listing in the U.S.?

Meeting the criteria

There are currently only a few companies that meet all of these criteria. In the first article of this series, I covered Kelly Services Inc. (KELYA, Financial) and then CSS Industries Inc. (CSS, Financial), which, as it turned out, was undervalued by around 73%.

The third company to pass all the criteria is Big 5 Sporting Goods Corp. (BGFV, Financial).

Like all retailers, Big 5 has seen its investors flee as Amazon dominates the space. Over the past 12 months, its shares have lost around 60%, falling from a high of $20 to $5 currently. These declines have pushed the market value down to $176 million, around one-fifth of sales.

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Despite the market pessimism, Wall Street is not predicting doom for Big 5. The company reported earnings per share of 77 cents for 2016 and earnings of 91 cents are projected for 2017. For 2018, earnings are expected to head higher to $1.03. Based on these estimates, shares trade at a forward P/E of 8.2.

So Big 5 passes Graham’s first criteria. The company also has a strong balance sheet with a current ratio of tw0 times at the end of 2016. The company's long-term debt to working capital ratio is 0.25, certainly below Graham's requirement of 1.1 times.

On the topic of earnings growth, the company has reported positive EPS for the past six years as earnings have grown at a compound annual rate of 7.7%. Over the same period, the company’s dividend has expanded at a CAGR of 11.8%, from 30 cents in 2011 to 60 cents for 2017.

EPS of 77 cents were reported for fiscal 2016, up from 53 cents in 2011.

The company's book value per share at the end of fiscal 2016 was $9.3, indicating it is currently trading at a price-book (P/B) ratio of 0.85 and price to tangible book ratio of 0.8.

Big 5 has its primary listing in the U.S.

Calculating valuation

Big 5 ticks all the boxes on the enterprising investor list. Considering the company’s valuation in relation to the rest of the market and retail sector, it looks undervalued.

Specifically, the forward P/E of 8.1 is below the specialty retailers sector median of 13.8 and an EV/EBITDA ratio of 3.8 is half the industry median of 8.1. On top of this lowly valuation, investors are also entitled to a dividend yield of 7.5%. Put simply, it looks as if Big 5 is certainly a company worthy of further research.

Disclosure: The author owns no stocks mentioned.