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  Searching for contrarian plays in sporting goods

BENJ GALLANDER and BEN STADELMANN

Friday, August 8, 2014

Hockey fans may not be thinking about their favourite sport while lounging on a dock in cargo shorts, but since the winners of the 2014 Stanley Cup play the game near the palm trees of Venice in fantastic L.A., maybe hot weather and hockey don't form such a strange alliance after all.

So with the mercury skating at summer temperatures, we thought it would be perfectly contrarian to take a look at a company that is mostly known for selling hockey equipment.

When we first thought about Bauer Performance Sports, it was still known as such. But in June, it became Performance Sports Group and held an IPO on the NYSE, selling 7.1 million shares at a price of $15.50. To a lot of Canucks who grew up immersed in the pseudo-religion that is hockey, Bauer is a name as Canadian as Tim Hortons, O-Pee-Chee, and Don Cherry all rolled into one.

The company shares might have been trading in Canada for only three years, but the story began in 1927 in Kitchener, Ontario. Interestingly, the famous Boston Bruins' "Kraut Line," named for the fact that the players were all from the city (formerly named Berlin), included a Bauer.

It's not just a coincidence that "Bauer" was dropped when the shares were presented to the U.S. market. The name is unfamiliar to Americans, and likely a bit puzzling to pronounce at first sight, but the change really reflects a strategy to become a package of sporting brands.

Back in 2008, the private equity group Kohlberg bought Bauer Hockey from Nike for $200 million. For the sports gear behemoth, the Bauer component was never anything more than small potatoes. Plus, they said, fewer kids were playing hockey because of the expense and risk of injury.

But Nike's main enemy, Reebok, which owns CCM — another iconic Canadian hockey label — never got rid of its hockey division, and it has Sidney Crosby as its prime endorser. Bauer's big-gun promoter is Sid's nemesis, Alexander Ovechkin.

Performance Sports Group is kind of like the Yum! Brands of sporting goods. They've made seven acquisitions in the last six years, with the most recent and notable being the $330 million purchase of Easton Baseball/Softball, which is the top name on the diamond.

It took on some sizable debt, which will be reduced to a more reasonable level with some of the money from the IPO. Bauer grew its hockey business to lead in every category, and it wants to do the same with baseball. There are more competitors in the $1 billion global baseball market, so consolidating the space seems reasonable. It fits well with the company's appetite for growing through acquisition and a need to develop globally.

The story of Performance Sports Group is one of expansion and momentum and thus pretty much as anti-contrarian as can be. It's an expensive stock by our estimates, one that has not traded nearly long enough to garner a sense of future pricing. The company is growing sales, but lost money in the third quarter, although the first half of the year was profitable.

CEO Kevin Davis is always a pleasant guy to watch showing off the company's newest technology, and Performance allocates millions each year to R&D. That is necessary to ward off competitors and keep consumers coming back for fresh, hot products.

However, we wouldn't touch this one with a five-foot, five-inch pole — which happens to be the same length as Zdeno Chara's hockey stick, which comes with a league exemption. It's made by a competitor, Warrior Sports, but you can't win ‘em all.


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