Johnson Outdoors A Buy At Imperial Capital, Sees Single-Time Costs Diminishing

Imperial Capital has started coverage of Johnson Outdoors Inc. JOUT with a Buy rating, citing steadily improving financials and falling one-time costs.

Johnson Outdoors is the owner of well-known sporting goods and outdoors brands, including Minn Kota, Humminbird, Eureka!, Jetboil, Old Town, and Scubapro.

The brokerage set a price target of $40, which implies a potential upside of 38 percent above the recent share price.

"We believe Johnson Outdoors is undervalued given its financial profile (revenue growth, strong free cash flow, underleveraged balance sheet) and portfolio of brands (especially Minn Kota)," analyst George Kelly wrote in a note.

"With a costly legal battle and other one-time issues behind the company, we believe results should become "cleaner" and more straightforward, and shine a spotlight on JOUT's core profitability," Kelly continued.

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Kelly sees further potential upside, if the company opts to restructure or prioritize its key business units. The analyst estimates Johnson Outdoors' brand portfolio is worth over $60 per share.

Moreover, the analyst said the company's growing free cash flow and potential for increased dividends and/or acquisitions will help to improve valuation. Johnson Outdoors currently generates a 10 percent free cash flow yield, and its $68 million in net cash gives the company ability to return capital or grow EBITDA through acquisitions. The company is comfortable with up to 2.5–3.0x leverage.

Kelly expects EPS of $1.60 for 2016 and $1.93 for 2017, with revenue of $443 million and $450 million, respectively.

On the valuation front, Kelly noted that the company trades at less than half the group average in terms of both EV/EBITDA and EV/Revenue. The $40 price target is based on 7x 2017 EBITDA, still a discount to the group.

Shares of Johnson Outdoors closed Tuesday's regular trading at $29.09.