Morgan Stanley Says Performance Sports Q3 Whiff Changes Thesis; Downgrades To Equal-weight

Morgan Stanley’s Jay Sole downgraded the rating for Performance Sports Group Ltd PSG from Overweight to Equal-weight, while reducing the price target from $19 to $5. The analyst mentioned that the company’s 3Q profit warning indicates poorer-than-earlier-anticipated visibility into the business and a highly uncertain outlook for baseball sales.

Deteriorated Sporting Goods Retail Environment

Performance Sports announced a profit warning, while reducing the midpoint of its EPS guidance for FY16 by 81 percent. The main reasons for the revised outlook are:

1. Weaker sales outlook, especially for baseball/softball bats
2. Additional bad debt allowances for certain US hockey retailers and related anticipated loss of sales from these customers
3. A national sporting goods retailer filing for bankruptcy, resulting in a write down of receivable balance

“We continue to believe PSG owns high quality brands and a unique innovation engine. However, the sporting goods retail environment is in disarray, especially in baseball, and earnings visibility has become very poor,” analyst Jay Sole wrote.

Sole added that bat sales were unlikely to recover meaningfully before FY18, while the company suffers impaired cash flow generation and high leverage.

The EPS estimates for FY16, FY17 and FY18 have been reduced from $0.66 to $0.13, from $0.75 to $0.39 and from $1.10 to $0.69, respectively.