Hunting for Earnings

Fore! For those who follow golf, this week is huge.

The young phenom, Jordan Spieth, seeks to win the third major of the year, The Open Championship, i.e. the British Open, at the Old Course at St. Andrews, Scotland. Spieth’s success is making both golf fans and golf equipment and apparel makers nostalgic and optimistic about the future of the sport.Under Armour, Inc. (NYSE – UA - $88.80), who has a big deal with Spieth, is up over 23% for the year. One of our prior [small cap] golf picks, Calloway Golf Company (NYSE – ELY - $9.04), is up over 13% for the year. The question is will this continue for the sport and will the momentum continue in the overall sports sector as well?

In this week’s Guide we discussed how financial reporting quarterly results and earnings are a vital part of a stock’s performance. We continued the sports theme and looked at a potential candidate. Cabela’s, Inc. (NYSE – CAB - $51.58) might be out of our small cap world but could be a sound play as hunting season approaches. An improved economy, the possibility of lower gas prices, could make for a huge season for the Company which could impact the financial reporting results later on. Additionally, the Company turned the EPS surprise back to the black for its 2015 Q1 results.

Cabela’s,together with its subsidiaries, operates as a specialty retailer and direct marketer of hunting, fishing, camping, and related outdoor merchandise. The Company operates through three segments: Retail, Direct, and Financial Services. The Retail segment sells products and services through its retail stores. The Direct segment sells products through its e-commerce Websites, such as Cabelas.com and Cabelas.ca, as well as direct mail catalogs. The Financial Services segment issues Cabela’s CLUB Visa credit card, a reward based credit card program; and certificates of deposits, as well as underwrites credit statistics. It offers its Cabela’s CLUB Visa credit cards through various channels comprising Website, retail stores, inbound telemarketing, and catalogs.

The Company’s product portfolio includes hunting equipment, such as firearms, ammunition, optics, archery products, and related accessories and supplies; and clothing and footwear products comprise fieldwear apparel and footwear, sportswear apparel and footwear, and workwear products, as well as casual apparel and footwear. As of the end of 2014, the Company had 61 stores nationwide.

Margins are one thing that jumps out impressively with CAB. An operating margin of 9% and gross margin of 43% are in the 80% and 28% industry percentiles, respectively. Even conservative analysts’ estimates have the revenue CAGR average of about 12% over the next two years over 2014 putting 2016 sales at nearly $4.6 billion, brining the five year PEG to a low 1.3. Finally, on the technical side, the short term EMA is very bullish at this time.

We think CAB is a solid Company and a solid earnings momentum play. Look for an accumulation phase to start soon and a target of $62 for this year.

Have a great day!

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