As the PGA Tour's season edges closer to an end for 2010 and football season begins, it would be interesting to observe four sports-related stocks that are equally weighted between micro-caps, small-caps, mid-caps and large-caps.
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Micro Cap: Adams Golf (Nasdaq:ADGF)
Although Tom Watson and Bernhard Langer use its clubs, it's had a checkered past, chock full of good news and bad. For instance, its best year in the last 10 was in 2007 when it generated $95 million in revenue and $4 million in operating income. Its worst came in 2000 when its operating loss was $39 million from $42 million in sales. Not surprisingly, its stock dropped 75% that year. Year-to-date, its stock is up 50% and its much-improved second quarter is driving it higher. In Q2 ending June 30, 2010, Adams increased revenues by 36% year-over-year to $31.6 million and, most importantly, delivered a net profit of $4.9 million against a loss of $5.2 million a year earlier. If it can just break even in the second half of 2010, you're talking about a stock trading at a forward P/E of just over 5 for 2010. Given that Callaway's (NYSE:ELY) six-month numbers are also greatly improved, the true P/E is likely even lower. It could easily rise above $10 by the end of the year.
Small Cap: Volcom (Nasdaq:VLCM)
I've liked Volcom for a while now. Back in October 2008, I made what I thought was a strong case for buying its stock at the $10 level. It's up 42.7% since then, yet I know it can do more. It went public June 30, 2005, at $19 and closed its first day of trading up 41%. How much more it will rise is up for debate, since its operating margins have been halved since 2005. Don't be alarmed. Despite a second quarter that only broke even on a 15% revenue gain, Volcom management feel its short-term and long-term plans are on target, and it's increasing market share. Its earnings' yield is 11.2% and return on capital 14.6%, both very respectable, if not robust. At the end of the day, I'm betting that as it takes market share, operating margins will begin to rise. It's not as cheap as it was in 2008, but it isn't expensive either. (We look at a retailer's inventory turnaround times, its receivables as well as its collection period, check out Measuring Company Efficiency.)
Mid Cap: VF Corp. (NYSE:VFC)
I don't why, but I tend to view VF as a large cap, despite the fact its market cap is just $8.4 billion. I guess it's because it has so many well-known brands across several segments you just assume it's the case. In April, when it was trading at its 52-week high of $89.73, it pretty much was. After an excellent second quarter in which it increased sales 7% to $1.6 billion and earnings per share 47% year-over-year to $1 from 68 cents, it won't take long to reach the milestone. All five of its segments increased operating income during the quarter. CEO Eric Wiseman has reason to be optimistic about the future. If there were a more diversified apparel company out there that's as profitable as VF, I'd love to know about it. With all the stores its building to further its brand globally, it won't take long to become a jumbo cap.
Large Cap: Nike (NYSE:NKE)
Lastly, we have the granddaddy of sports. Next to VF, this will be my easiest of the picks. Despite Tiger Woods having a difficult year, Nike sure isn't. It seems it can do no wrong. In May, it announced an ambitious five-year business plan that will see revenues grow by 40% to $27 billion worldwide. Key to its growth will be the non-Nike brands like Converse, Hurley, Umbro and Cole Haan. With cash flow estimated to be $12 billion in 2015, it's repurchasing $5 billion in stock (Let's hope they're smart buyers) and using the remaining cash to acquire other brands where they can add value. It's beaten the S&P 500 in eight of the last 10 years, and is doing so again in 2010. Tuck this one in the drawer and forget about it. (Key financials often fail to provide insight into large cap companies, check out The Importance Of Segment Data.)
From golf to a more active clothing company (Volcom and VF) and finally all of the above in clothing and golf with Nike, this is just the start of a solid sports portfolio.