8/26/2016

A Market Mispriced Opportunity? Black Diamond



Black Diamond (BDE) designs manufactures and markets outdoor equipment and apparel for climbing, mountaineering, backpacking, skiing, cycling and other leisure related activities.

Summary Investing Points:


1) Global financial advisory Rothschild was hired on November 9, 2015 to assist company in redeployment of significant cash balance and NOL.  

2) Black Diamond is an industry respected brand name with a loyal following. Read positive reviews on the many products sold through Amazon.http://amzn.to/2bRv68y

3) An incomplete strategic review process initiated March 2015 did result in a profitable sale of equity interest in POC for 65M on October 2015. Black Diamond originally acquired POC in July 2012 for approximately $44.9M increasing value to 65M. Post-transaction, the Company expects to have approximately $100.0 million in cash, $22.6 million in debt and around $167.0 million in net operating loss carry forwards. http://bit.ly/2bkPoJ6 

4) Executive chairman Warren Kanders is a proven capital allocator. He holds 25% of the shares outstanding. Kanders used CLRS.PK (a shell company with no current operating business but instead 86 million in cash and 223 million in NOLs) to acquire both Black Diamond Equipment, Ltd. ("Black Diamond") and Gregory Mountain Products, Inc. ("Gregory") during 2010. 
See my original Seeking Alpha post on Clarus ("Ideal Market Environment for Clarus").http://bit.ly/2bF6dkd

Further, it's important to note Mr. Kanders and Schiller (5.1% owner and board member of BDE) built up a company called Armor (AH). They made over 30 acquisitions during a 12 year period. On July 2007 they sold AH (Armor) to BAE Systems for 3.1 Billion.






Conclusion:


Black Diamond trades at a large discount to its historical and relative valuation. Trades for only 1 times its TTM gross profit of 54.5M.NCAV is 3.99 versus the current price of $4.49. Company's renewed focus on its growing climbing industry. A cult following with a lower cost structure from restructuring will generate future free cash flow. "During 2016, we expect to generate free cash flows of around $5 million before corporate costs and related activities. We continue to target combined 10% EBITDA margins for Black Diamond Equipment and PIEPS in 2017."

The most recent quarter disappointed from negative foreign currency impact, manufacturing operation move from China to Utah and unfavorable product mix impacting gross margins. "Second quarter SGA, which excludes restructuring, merger, and integration transaction, costs were down 18% to $11.6 million."  This decline from realization of savings from restructuring plan implemented in 2015.

Further evidence it trades at a large discount to historical and relative valuations.  
Modest share count reduction, 2012 shares outstanding were 31.76M down to MRQ 30.85M. Improving F score is 5 for the most recent quarter compared from 2 for 2012. NCAV is $3.99 versus .99 for 2013. Enterprise value is 57.90M versus EV of 466.10 for 2013. EV/Rev = .38 versus 3.08 for 2013. P/TB = 1.03 versus 4.23 for 2013. Short as a % of float was 19.04% for 09/2013, 8.20% June 2016 and is now at 3.70% on August 15, 2016. The company sale is likely after additional acquisitions based on Kanders historic record in my opinion.



 













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  Long BDE

1 comment:

ShadowStock said...

I’m expecting Kanders to create something of value. Kanders and others will not let this creation die at current market price. Not significant but corporate headquarters, retail, manufacturing sits on ~ 7 acres in Salt Lake City purchased for 1 million in 1991.

Kanders somehow was able to take a defunct SOFTWARE company CLRS and use their NOL's/cash to create the public entity BDE with the purchase of Black Diamond and Gregory. It seems Kanders and his board has expertise in leveraging tax assets, obtaining financing for new acquisitions.

Armor Holdings (AH) built by Kanders and others on the BDE board (Robert R. Schiller 5.10% BDE owners , BDE board member) created and then sold Armor for 4.1Billion to BAE Systems in 2007.

Robert R. Schiller BDE 5.1% owner and Board member is
“Executive Vice Chairman since May 2010. Mr. Schiller served as Vice Chairman of the Board of Directors of Gregory Mountain Products ("Gregory") from March 2008 until May 2010. From July 1996 until its sale to BAE Systems on July 31, 2007, Mr. Schiller served in a variety of capacities at Armor Holdings, including as a Director from June 2005, President from January 2004, Chief Operating Officer from April 2003, and Chief Financial Officer and Secretary from November 2000 to March 2004. Mr. Schiller graduated with a B.A. in Economics from Emory University in 1985 and received an M.B.A. from Harvard Business School in 1991. Based upon Mr. Schiller's role as Executive Vice Chairman of the Company as well as his extensive experience as an executive officer and director, together with his educational experience and his extensive operational, acquisition, corporate governance, FINANCIAL AND TRANSACTIONAL EXPERTISE, the Company believes that Mr. Schiller has the requisite set of skills to serve as a Board member of the Company.”