BDE - Black Diamond

[Orchard]

I just started a blog. My first post is on Black Diamond. Here's the summary:

 

Black Diamond trades at a discount to tangible book value while a lot of equipment / apparel companies earn a good return on their tangible book value and therefore are worth more than book value. The value above tangible book value is supported by acquisition multiples in the 0.5-2.0x EV / revenue range while Black Diamond trades around 0.31x revenue. However, most companies were profitable at the time of purchase. Black Diamond has sold 2 assets in the last 12 months that are comparable to its remaining assets. POC sold for 1.9x revenue and Gregory sold for 2.4x revenue. The Black Diamond business has grown ~9.5% annually since its acquisition in mid-2010. The company is led by chairman Warren Kanders who has an impressive track record.

 

Full post: http://cosinvestments.blogspot.com/2015/11/black-diamond-bde.html

[KJP]

The link at the post above appears to be dead, so I'll start with an overview:  Shares have dropped by more than 50% from their March 2015 high, apparently due to the company's inability to find a buyer for all of its assets.  For a current market cap of about $150 million, you get (i) an outdoor equipment and apparel company with about $150 million in annual revenue in an industry in which such companies appear to valued well above 1x revenue in public transactions; (ii) about $75 million in net cash; and (iii) about $130 million in federal NOLs, the majority of which expire by 2022. 

 

This asset pile is the residue of failed roll up.  In 2010, an NOL shell called Clarus bought the Black Diamond brand and another outdoor company called Gregory and renamed itself Black Diamond, Inc.  The plan was to use the new company as a "platform" for rolling up other outdoor equipment companies and to launch a line of Black Diamond-branded apparel.  Over the next few years, the company acquired two more outdoor equipment companies (POC and PIEPS) and significantly ramped SG&A to build out worldwide distribution and the apparel business. 

 

The strategy was not successful.  Although the company maintained or even slightly increased gross margins, sales did not grow fast enough to support the increased SG&A, much less use up the NOLs.  So, over the last two years, the Company has unwound its roll up by selling off Gregory and POC, both for more than they cost to acquire.  Although it appears the company also sought to sell Black Diamond and PIEPS, it did not get acceptable offers.  So, the company now consists of (i) Black Diamond and PIEPS, (ii) about $75 million in net cash, and (iii) about $130 million in federal NOLs, the vast majority of which expire by 2022.     

 

During its 3Q conference call, the Company chairman stated that the Company intended to right size the cost structure of remaining Black Diamond/PIEPS business to get to 10% EBITDA margins before corporate costs while attempting to use its cash to buy a business that could use up the NOLs. 

 

If you assign no value to the NOLs and full credit for $75 million in next cash, then the remaining operating business is selling for about $75 million, or 0.5x revenue.  Based on the following examples, that appears to be far too low:

 

1) Clarus purchased Black Diamond for about 1x revenue in 2010

2) Gregory was sold for 2.4x sales

3) POC was sold for 1.9x sales

 

The Company has presumably already sold off its best parts, so I wouldn't assign a 2x revenue multiple to the remaining Black Diamond/PIEPS business.  In addition, the company marketed Black Diamond and PIEPS and couldn't get an acceptable price.  So some conservatism in assessing the private market value of these assets is warranted.  But the company has maintained Black Diamond's historical gross margins.  So, it doesn't appear that the brand value has been destroyed.  In addition, they've continued to increase sales.  So, a 1x revenue multiple for the remaining business doesn't seem unreasonable for what, historically, has been a profitable stand alone business.  Here are the revenue, gross profit margin and operation profit margins of the Black Diamond business from 2006 - 2009:

 

2006: $56 million/37%/6%

2007: $64 million/37.5%/5%

2008: $78 million/37%/4.5%

2009: $88 million/37%/7%

 

The company's current gross margins are around 40%, though they are currently being depressed by currency movements (USD costs vs. Yen and Euro revenues).  In addition the business is not particularly capital intensive, with net PPE of only around $10 million.  So, if SG&A can be cut down to size a 10% EBITDA margin does not seem implausible, nor does a 1x revenue valuation.

 

So, as a base case, you'd have an EV of about $225 million ($75MM cash, $150MM at 1x revenue, $0 for the NOLs), which is 50% upside from today's prices.  There's more potential upside from a higher multiple on Black Diamond or a successful transaction that can extract value from the NOLs.  I believe the downside is limited, because of the net cash and brand value of Black Diamond, but there could be downside from possible cash burn if Black Diamond can't be right-sized or if the company overpays in a deal. 

 

 

 

[Orchard]

The above link should still work.

 

The company held its annual shareholder meeting on December 11. Warren Kanders reiterated his intent to acquire a company with an enterprise value in the range of $250-500M. They target companies outside of the outdoor industry. Since my high point for the value of BD / Pieps is ~$140M, the new acquisition will clearly be the primary driver for current shareholders. Due to Warren Kanders' track record I do think that is an interesting proposition.

[JayGatsby]

Not to change the subject, but am I reading it right that Kanders started his investment firm at the age of 27 and became chairman of what became Armor Holdings at 33? http://www.blackdiamond-inc.com/phoenix.zhtml?c=118683&p=irol-govBio&ID=214898 . I was vaguely familiar with him but didn't realize the extent of his success. Anyone know how he got his start financially? Looks like he had at least some family money based on his high school.

[KJP]

The above link should still work.

 

Yes, it's working for me now.

[flesh]

Black diamond is a great company, I climbed at a climbing gym on location at headquarters for a decade. This is a strong durable brand with a strong following and I expect them to be quite profitable as they right size things and get back to the fundamentals. I have a 5% position at current prices.

[wjsco]

The link at the post above appears to be dead, so I'll start with an overview:  Shares have dropped by more than 50% from their March 2015 high, apparently due to the company's inability to find a buyer for all of its assets.  For a current market cap of about $150 million, you get (i) an outdoor equipment and apparel company with about $150 million in annual revenue in an industry in which such companies appear to valued well above 1x revenue in public transactions; (ii) about $75 million in net cash; and (iii) about $130 million in federal NOLs, the majority of which expire by 2022. 

 

This asset pile is the residue of failed roll up.  In 2010, an NOL shell called Clarus bought the Black Diamond brand and another outdoor company called Gregory and renamed itself Black Diamond, Inc.  The plan was to use the new company as a "platform" for rolling up other outdoor equipment companies and to launch a line of Black Diamond-branded apparel.  Over the next few years, the company acquired two more outdoor equipment companies (POC and PIEPS) and significantly ramped SG&A to build out worldwide distribution and the apparel business. 

 

The strategy was not successful.  Although the company maintained or even slightly increased gross margins, sales did not grow fast enough to support the increased SG&A, much less use up the NOLs.  So, over the last two years, the Company has unwound its roll up by selling off Gregory and POC, both for more than they cost to acquire.  Although it appears the company also sought to sell Black Diamond and PIEPS, it did not get acceptable offers.  So, the company now consists of (i) Black Diamond and PIEPS, (ii) about $75 million in net cash, and (iii) about $130 million in federal NOLs, the vast majority of which expire by 2022.     

 

During its 3Q conference call, the Company chairman stated that the Company intended to right size the cost structure of remaining Black Diamond/PIEPS business to get to 10% EBITDA margins before corporate costs while attempting to use its cash to buy a business that could use up the NOLs. 

 

If you assign no value to the NOLs and full credit for $75 million in next cash, then the remaining operating business is selling for about $75 million, or 0.5x revenue.  Based on the following examples, that appears to be far too low:

 

1) Clarus purchased Black Diamond for about 1x revenue in 2010

2) Gregory was sold for 2.4x sales

3) POC was sold for 1.9x sales

 

The Company has presumably already sold off its best parts, so I wouldn't assign a 2x revenue multiple to the remaining Black Diamond/PIEPS business.  In addition, the company marketed Black Diamond and PIEPS and couldn't get an acceptable price.  So some conservatism in assessing the private market value of these assets is warranted.  But the company has maintained Black Diamond's historical gross margins.  So, it doesn't appear that the brand value has been destroyed.  In addition, they've continued to increase sales.  So, a 1x revenue multiple for the remaining business doesn't seem unreasonable for what, historically, has been a profitable stand alone business.  Here are the revenue, gross profit margin and operation profit margins of the Black Diamond business from 2006 - 2009:

 

2006: $56 million/37%/6%

2007: $64 million/37.5%/5%

2008: $78 million/37%/4.5%

2009: $88 million/37%/7%

 

The company's current gross margins are around 40%, though they are currently being depressed by currency movements (USD costs vs. Yen and Euro revenues).  In addition the business is not particularly capital intensive, with net PPE of only around $10 million.  So, if SG&A can be cut down to size a 10% EBITDA margin does not seem implausible, nor does a 1x revenue valuation.

 

So, as a base case, you'd have an EV of about $225 million ($75MM cash, $150MM at 1x revenue, $0 for the NOLs), which is 50% upside from today's prices.  There's more potential upside from a higher multiple on Black Diamond or a successful transaction that can extract value from the NOLs.  I believe the downside is limited, because of the net cash and brand value of Black Diamond, but there could be downside from possible cash burn if Black Diamond can't be right-sized or if the company overpays in a deal.

 

I think that he probably received offers in the 1x range, and that's why he didn't sell it. Basically, BDE's cost structure was built to support a platform, which they're moving away from. So their cost structure was too darn high. Really, people buy earnings, and then we back out to a revenue number - so, BDE doesn't earn alot, and ppl wouldnt pay up. but it has a bloated cost structure. so, with an appropriate cost structure, could be worth 2x. right?

[wachtwoord]

Doing some reading on this. I'll leave this here https://web.archive.org/article/3964695-perpetual-special-situation-black-diamond-blazing-unnecessarily-difficult-trail

[wjsco]

Look, I think Kanders capitulated on the whole roll-up thing. They've now divested 2 of their 3 big businesses (excl PIEPS), and Kanders acquired an outdoor apparel company for his own PE firm. So, I think they're going to improve BDE's cost structure, but then I don;t think they really want to hold it...I think theyll fix up expenses a bit, and then try to sell it again. i might be wrong. but it seems like he's given up on this whole thesis...

 

either way, BDE/PIEPS are worth more than what they paid. They paid $90m for bde and $15 for pIEPSs, and theyve grown at 9-10% cagr for 5 years since purchase. theyre probably worth closer to 2x sales, definitely worth 1x sales, and MOST definitely worth what they originally paid. So, original purchase prices of $90 + $15 = $105, plus net cash of $75, gets us to $180 - that's our valuation floor. Likely worth alot more, and doesn't include NOLs. But that's a good starting point, and it's not hard to get comfortable with it, IMO. And you can purchase for significant discount to 180 right now. Very little downside, fairly significant upside. i think im going to open a small-ish position

[KJP]

Look, I think Kanders capitulated on the whole roll-up thing. They've now divested 2 of their 3 big businesses (excl PIEPS), and Kanders acquired an outdoor apparel company for his own PE firm. So, I think they're going to improve BDE's cost structure, but then I don;t think they really want to hold it...I think theyll fix up expenses a bit, and then try to sell it again. i might be wrong. but it seems like he's given up on this whole thesis...

 

either way, BDE/PIEPS are worth more than what they paid. They paid $90m for bde and $15 for pIEPSs, and theyve grown at 9-10% cagr for 5 years since purchase. theyre probably worth closer to 2x sales, definitely worth 1x sales, and MOST definitely worth what they originally paid. So, original purchase prices of $90 + $15 = $105, plus net cash of $75, gets us to $180 - that's our valuation floor. Likely worth alot more, and doesn't include NOLs. But that's a good starting point, and it's not hard to get comfortable with it, IMO. And you can purchase for significant discount to 180 right now. Very little downside, fairly significant upside. i think im going to open a small-ish position

 

I agree with most of this, particularly the comparison of current market cap to 1x Sales + excess cash.  It's trading significantly under that amount, and you have potential upside from NOLs and higher multiple on remaining operating business. 

 

It's a pretty simple idea that I'm surprised hasn't received more interest.  What is the downside/bear case? 

[Foreign Tuffett]

Look, I think Kanders capitulated on the whole roll-up thing. They've now divested 2 of their 3 big businesses (excl PIEPS), and Kanders acquired an outdoor apparel company for his own PE firm. So, I think they're going to improve BDE's cost structure, but then I don;t think they really want to hold it...I think theyll fix up expenses a bit, and then try to sell it again. i might be wrong. but it seems like he's given up on this whole thesis...

 

either way, BDE/PIEPS are worth more than what they paid. They paid $90m for bde and $15 for pIEPSs, and theyve grown at 9-10% cagr for 5 years since purchase. theyre probably worth closer to 2x sales, definitely worth 1x sales, and MOST definitely worth what they originally paid. So, original purchase prices of $90 + $15 = $105, plus net cash of $75, gets us to $180 - that's our valuation floor. Likely worth alot more, and doesn't include NOLs. But that's a good starting point, and it's not hard to get comfortable with it, IMO. And you can purchase for significant discount to 180 right now. Very little downside, fairly significant upside. i think im going to open a small-ish position

 

I agree with most of this, particularly the comparison of current market cap to 1x Sales + excess cash.  It's trading significantly under that amount, and you have potential upside from NOLs and higher multiple on remaining operating business. 

 

It's a pretty simple idea that I'm surprised hasn't received more interest.  What is the downside/bear case?

 

I think the bear case is that Black Diamond Equipment is never able to regain profitability and Kanders isn't able to find a acquisition. There are also serious product liability concerns, given the nature of the products the company sells. Finally, the company has changed directions and management an almost bewildering array of times in the past few years.

 

All this said, I agree with you guys that BDE looks interesting. At the current price the EV is only about $55.5M. This seems too cheap for a company that management is projecting to do $145 - 150M in revenue this year.

[KJP]

 

I think the bear case is that Black Diamond Equipment is never able to regain profitability and Kanders isn't able to find a acquisition.

 

The rational response to those outcomes is to sell the operating business and liquidate.  Shareholders should do well if that happens.  That's why, at least in my mind, it's hard to see significant downside here.

 

EDIT:  I think the real downside does not come from no acquisition (the market already seems to be valuing the NOLs at zero), but rather a bad, money-destroying acquisition. But what are the odds of that?  Even though the roll-up strategy didn't work, I believe the pieces have been sold for more than they cost to buy.  So, the individual past acquisitions haven't been bad; it was the overall strategy that didn't work. 

[jeffmori7]

I haven't look at the numbers yet, but from a consumer standpoint, Black Diamond is one of the highest quality brand in the outdoor world. I have always appreciated my Black Diamond stuff, and the name in itself probably has a great value in this specific market.

[wachtwoord]

Look, I think Kanders capitulated on the whole roll-up thing. They've now divested 2 of their 3 big businesses (excl PIEPS), and Kanders acquired an outdoor apparel company for his own PE firm. So, I think they're going to improve BDE's cost structure, but then I don;t think they really want to hold it...I think theyll fix up expenses a bit, and then try to sell it again. i might be wrong. but it seems like he's given up on this whole thesis...

 

either way, BDE/PIEPS are worth more than what they paid. They paid $90m for bde and $15 for pIEPSs, and theyve grown at 9-10% cagr for 5 years since purchase. theyre probably worth closer to 2x sales, definitely worth 1x sales, and MOST definitely worth what they originally paid. So, original purchase prices of $90 + $15 = $105, plus net cash of $75, gets us to $180 - that's our valuation floor. Likely worth alot more, and doesn't include NOLs. But that's a good starting point, and it's not hard to get comfortable with it, IMO. And you can purchase for significant discount to 180 right now. Very little downside, fairly significant upside. i think im going to open a small-ish position

 

How do you get to $75 in net cash?

 

Cash + marketable securities + accounts receivable minus total liabilities? Cause that yields $72.36M on March 31st to be exact. I'm just asking to make sure we're talking about the same numbers here (fore example whether you're counting accounts receivable at full value).

 

NCAV is $124.3M or $4.03 a share. It's trading only 5.7% above that.

 

The main question you have to ask yourself here is whether this company can turn a profit. They haven't in a few years. Interesting.

[KJP]

 

How do you get to $75 in net cash?

 

 

$86.3 million cash + $9.9 million marketable securities - $20.5 in debt = ~$75 million in "net cash".

[Foreign Tuffett]

 

I think the bear case is that Black Diamond Equipment is never able to regain profitability and Kanders isn't able to find a acquisition.

 

The rational response to those outcomes is to sell the operating business and liquidate.  Shareholders should do well if that happens.  That's why, at least in my mind, it's hard to see significant downside here.

 

EDIT:  I think the real downside does not come from no acquisition (the market already seems to be valuing the NOLs at zero), but rather a bad, money-destroying acquisition. But what are the odds of that?  Even though the roll-up strategy didn't work, I believe the pieces have been sold for more than they cost to buy.  So, the individual past acquisitions haven't been bad; it was the overall strategy that didn't work.

 

No acquisition means it's unlikely the NOLs are substantially used up before they expire (unless Black Diamond ends up being sold for a high enough amount). Keep in mind that they begin to expire in 2021, with the majority expiring in 2022. Although I think they have plenty of time to execute, the clock is ticking on the NOLs.

 

I agree with whomever wrote that the medium term plan is to fix up Black Diamond and PIEPS in order to sell them.

[wjsco]

 

I think the bear case is that Black Diamond Equipment is never able to regain profitability and Kanders isn't able to find a acquisition.

 

The rational response to those outcomes is to sell the operating business and liquidate.  Shareholders should do well if that happens.  That's why, at least in my mind, it's hard to see significant downside here.

 

EDIT:  I think the real downside does not come from no acquisition (the market already seems to be valuing the NOLs at zero), but rather a bad, money-destroying acquisition. But what are the odds of that?  Even though the roll-up strategy didn't work, I believe the pieces have been sold for more than they cost to buy.  So, the individual past acquisitions haven't been bad; it was the overall strategy that didn't work.

 

Not just that the pieces have been sold for more than bought. They actually generated mid-teens IRRs on both purchases. So, in my mind, the roll-up strategy didn't work, but it's not like Kanders destroyed sharheolder equity. They actually created it. And he has a track record of good capital allocation. So, yes, you can knock them for the failed strategy, but even there, they sold the businesses at a substantial gain.

 

Clearly a bad purchase is a "risk." But I think the onus would be on you to say "he's going to make a bad purchase." The assumption SHOULD be that he won't. He has a lot of capital tied up here, incentives are aligned, and proven track record (even when they fail, like with BDE, they STILL created value).

 

At $15, you wouldve been paying a hefty Kanders premium. But in the $4 range, you're getting the assets at a significant discount, and aren't paying a kanders premium at all.

[wjsco]

I haven't look at the numbers yet, but from a consumer standpoint, Black Diamond is one of the highest quality brand in the outdoor world. I have always appreciated my Black Diamond stuff, and the name in itself probably has a great value in this specific market.

 

Agreed. I also don't think product liability is a risk. I mean, it is, but there's nothing you can do about it anyways, and they are a very reputable brand. Hell, they had some issues earlier this year, and instead of doing a warranty/refund, they did a recall (requires much more time/mgmt attention). So they take it very seriously.

[Picasso]

For what it's worth, I've heard nothing but good things about the brand.

[flesh]

I've been climbing 3-4 days a week since 1997.

 

REI is in the process of ramping up locations, BD is a major supplier.

 

Great company, top tier brand in the climbing industry which is growing like crazy.

 

They are based in utah and the number of climbing gym memberships in utah has grow 5x since 2000.

 

Climbing is becoming mainstream and may be in the Olympics in 2020.

 

With the advent of the popular/profitable mega gym, climbing gyms are going up all over the country like wild fire and with them brings new kids/coaching/teams/competitions. The climbing industry's future is bright. It's still in it's infancy when compared to the popularity it enjoys in europe where top competition climbers make front page news regularly.

 

I wouldn't be surprised at all if BD's top line continues to grow 5-10% a year in the climbing gear categories for another decade.

 

If you look back through recent ec transcripts you will see they are buying back a meaningful number of shares "when it's close to 4, but not close to 6"

 

This isn't your typical deep value, this company's core is growing and has a long runway of reasonable growth.

 

 

 

 

 

 

[sternalot]

I haven't look at the numbers yet, but from a consumer standpoint, Black Diamond is one of the highest quality brand in the outdoor world. I have always appreciated my Black Diamond stuff, and the name in itself probably has a great value in this specific market.

 

Highest quality? No. Best value? Maybe.

 

They picked a really bad time to repatriate their manufacturing.

[jeffmori7]

I haven't look at the numbers yet, but from a consumer standpoint, Black Diamond is one of the highest quality brand in the outdoor world. I have always appreciated my Black Diamond stuff, and the name in itself probably has a great value in this specific market.

 

Highest quality? No. Best value? Maybe.

 

They picked a really bad time to repatriate their manufacturing.

 

Patagonia is probably the best brand out there, IMO, but their products partially overlap only. Which brand would you put over Black Diamond? (OF course, for each niche product, there is probably something better out there, but overall, they are quite good, maybe one of the best value as you say).

[sternalot]

 

Patagonia is probably the best brand out there, IMO, but their products partially overlap only. Which brand would you put over Black Diamond? (OF course, for each niche product, there is probably something better out there, but overall, they are quite good, maybe one of the best value as you say).

 

 

If you look at climbing specific brands with large product portfolios, Petzl is considered the pinnacle. Petzl tends to win product shootouts across a vast swath of categories, although it tends to be slightly more expensive than BDE. In addition, Petzl's innovation is considered to be a step above BDE's - look no further than their work in ascenders or belay devices. There are also other brands that could be considered higher quality than Petzl, although they tend to be winners in very specific product categories. For instance, DMM is usually considered one of the best (if not the best) hardware manufacturers (carabiners, cams, etc.). However, their softgoods are far less sought after (harnesses, clothing, etc). Although Patagonia may have some product overlap, I would barely consider it a competitor to Black Diamond. 

 

If you spend some time looking at reviews of equipment across product categories, you will find that Black Diamond often wins best value. This has been my experience with their equipment on a personal level as well.

[jeffmori7]

 

Patagonia is probably the best brand out there, IMO, but their products partially overlap only. Which brand would you put over Black Diamond? (OF course, for each niche product, there is probably something better out there, but overall, they are quite good, maybe one of the best value as you say).

 

 

If you look at climbing specific brands with large product portfolios, Petzl is considered the pinnacle. Petzl tends to win product shootouts across a vast swath of categories, although it tends to be slightly more expensive than BDE. In addition, Petzl's innovation is considered to be a step above BDE's - look no further than their work in ascenders or belay devices. There are also other brands that could be considered higher quality than Petzl, although they tend to be winners in very specific product categories. For instance, DMM is usually considered one of the best (if not the best) hardware manufacturers (carabiners, cams, etc.). However, their softgoods are far less sought after (harnesses, clothing, etc). Although Patagonia may have some product overlap, I would barely consider it a competitor to Black Diamond. 

 

If you spend some time looking at reviews of equipment across product categories, you will find that Black Diamond often wins best value. This has been my experience with their equipment on a personal level as well.

 

Thanks. As I personally don't climb, I'm mostly a BD customer for clothes (hence the Patagonia comparison) or for skiing/hiking/camping gear. But I understand that climbing is probably their largest products division.

[flesh]

Any idea why we are sitting at 6.70 here? I had fair value pegged around 6 and can't see any reason to change that by much unless there is value creating m & a in the works to make use of the Stack of NOL's. Anyone hear anything?