Escalade, Incorporated Banks On Stay-at-Home Demand
Escalade Incorporated (NASDAQ:ESCA) is one of those stocks that rarely, if ever, gets any media attention. The company is a high-yielding micro-cap that, quite frankly, serves very niche markets if ones we are all familiar with. The company is a diversified play on home entertainment but its main categories include archery, billiards, darts, basketball hoops, and tailgating supplies; none of which command massive consumer demand. But that all changed when the pandemic struck and now the company is growing at a high double-digit pace. That fact, along with its immaculate balance sheet and high 3.0% yield, makes it one interesting investment despite its lack of head-line commanding status.
Escalade Accelerates In The 3rd Quarter
Escalade, Incorporated has seen a robust uptick in demand for its products across all lines. The switch to stay-at-home has people looking for new things to do both inside and out and this company is a go-to source for both. That said, the 70% uptick in 3rd quarter revenue is a surprise and beat the consensus estimate by $23.2 million or 42%. On a sequential basis, this is up more than 50% and shows a marked acceleration in business boosted not only by the pandemic but by demand for homes.
Moving down the report there is not one bad thing I can find. Gross margins improved by 820 basis points, operating income increased 342%, and GAAP EPS came in at $0.71 or up 390% and more than 100% above the analyst’s target. (FYI, there is only one analyst, Aegis with a buy, issued in September, 33% upside from recent price action).
"Amidst the backdrop of a global pandemic and a highly dynamic environment, our third-quarter growth rate continued to accelerate compared to the previous quarter, while gross margin expanded 820 basis points to 30.1%. These key growth factors resulted in the record quarterly net income of $10.2 million compared to $2.5 million in 2019," said Scott Sincerbeaux, President and CEO of Escalade, Inc.
Regarding future growth, comps in the coming year are going to be tough. While growth is expected to decelerate the gains are expected to be sticky and the company is working hard to make sure this is so. To that end, Escalade, Incorporated purchased American Heritage Billiards during the last quarter at a price tag of $1.55 million. The move is meant to enhance the existing Cue Case billiards business and help drive growth in future quarters.
Escalade Incorporated Is A High-Yielding Small-Cap Gem
To put it mildly, Escalade Incorporated may be the perfect dividend payer. The stock is yielding 3.0%, it has a history of steady increases, the payout ratio is low, and there is virtually no debt to speak of. When I say the payout ratio is low, it is running about 48% of the 2020 consensus but that number is meaningless now. Based on the last quarterly payout of $0.14 or $0.56 annually and the 3Q earnings report the payout ratio is running closer to 20%. When I say no debt I mean that debt-to-equity is running about 1.0% (that one percent) and coverage is about 75X interest expense and free-cash-flow is unimpeded.
"Our results, cash position and untapped debt facility allows us to return value to our shareholders while making key strategic investments to sustain growth. We are also actively looking to make key acquisitions to strengthen our portfolio of brands, add key channels of distribution and drive deeper connections to our customers and consumers,” Sincerbeaux continued.
The Technical Outlook: Buy Escalade, Incorporated But Not At These Prices
Shares of Escalade, Incorporated made a stunning rebound from the pandemic-low but it may have run its course. At least for now. Price action is pulling back from resistance even with the strong 3Q report and it looks like prices will fall further. Not only is MACD highly divergent from the recent high but stochastic is too, and it’s firing a bearish crossover/entry signal. In the near-term, I expect to see price action fall back to the $16 to $17 region before a bottom begins to show. Longer-term, I think this stock is a good buy for high-yield income investors.
