Times have really changed for Big 5 Sporting Goods (Nasdaq:BGFV). Going public at $13 a share on June 25, 2002, it's been on a roller coaster ride ever since. Today, its stock trades around $7, almost half its IPO pricing from nine years earlier. Its margins have shrunk and although its best days appear to be in the rearview mirror, those with an appetite for risk will find its stock very rewarding. Here's why. (To learn more about the risk and reward relationship in investing, read Determining Risk And The Risk Pyramid.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes, and insights

Making Money
In the past decade, it's achieved an operating profit each and every year. That's the good news. Unfortunately, its operating margin has decreased in five of the last 10 years and now sits around 3.1%, 510 basis points lower than 2004, its record setting year when it generated $64 million in operating income on $782 million in revenue. Those were the days. California was doing okay, even choosing to elect Arnold Schwarzenegger Governor only the year before. Seven years on and the state's not faring nearly as well and it clearly is affecting Big 5's business. But not enough to drive it into the red and that's the silver lining here. The sporting goods business is slow growth, yet very resilient. Competitors such as Hibbett's (Nasdaq:HIBB) and Dick's Sporting Goods (NYSE:DKS) have also had problems over the past decade, but they too have always generated operating profits. From this perspective, the risk appears less lethal.

Stock Price
Big 5's been a public company for 110 months. In that duration, it's traded below $5 for just 68 days. It's safe to assume this is a strong floor price. Not coincidentally, its gross and operating margins at the time are almost identical to the present. Its second quarter report was mostly negative with some potential light at the end of the tunnel. Diluted earnings per share were 14 cents, 8 cents lower than a year earlier. The good news, however, was that revenues were flat in the quarter, increasing by $2.4 million for the first six months of the year. It's almost as if the ship is slowly turning back into the wind. Analysts seem to have mixed feeling about its stock with ratings in recent days of 'buy,' 'neutral' and 'underperform.' Along with the ratings come price targets between $9.25 and $11.00. Doing a quick calculation using the Graham Number, I get a fair value of $11. However, that's based on a trailing 12-month EPS of 76 cents. By the end of the year, I expect that number will be around 45 cents, much lower than the analyst estimate of 64 cents. If so, you're looking at a fair value of $8.49. Big 5 has a history of earnings surprises both positive and negative, so it's difficult to pin down. Nonetheless, I believe much of the bad news is already factored into the stock price.

This is the most important piece of information in my opinion. Big 5 pays a quarterly dividend of 7.5 cents providing a yield of 4.3%. It's paid a dividend since 2004. Even with earnings per share of just 45 cents, its worst result in 10 years, its payout is only 67%. It has enough cash resources to keep the dividends flowing until business improves sometime in 2012. Risk averse investors will undoubtedly have a hard time pulling the trigger on this one but those willing to make the sacrifice will be well compensated for their patience. A majority of Big 5's stores are in states hit hard by unemployment and the housing crisis. Once these two stressors lessen, the upside is really quite inviting.

The Bottom Line
Whether we're talking about direct competitors like Hibbett's or Dick's or big-box peers like PetSmart (Nasdaq:PETM) or Best Buy (NYSE:BBY), they all have better operating margins than Big 5 despite having similar gross margins. This tells me Big 5's not nearly as efficient. Management will figure out how to fix this underperformance or they'll be bought out by someone who will. Either way, it will be at a price higher than $10 a share. (For more on underperformance, check out Analyst Recommendations: Do Sell Ratings Exist?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!