3 Reasons To Buy Big 5 Sporting Goods

Shares of Big 5 Sporting Goods Corporation BGFV surged more than 10 percent to reach a new 52-week high of $15.74 after Deutsche Bank upgraded the stock to Buy from Neutral.

Deutsche Bank's bullish thesis is based on three reasons that include:

"1) accelerating sales trends driven by market share gains after competitor liquidations; 2) profitability improvements from better merchandise margins and leverage on stronger sales; 3) higher earnings power from sales and profit increases that we do not yet believe are fully reflected in BGFV's valuation."

Analyst Mike Baker noted that investors are underestimating the benefits to Big 5 from the liquidation of The Sports Chalet and The Sports Authority. In particular, all of The Sports Chalet and 160 Sports Authority stores overlapped with Big 5.

Baker estimates "at least $250mm in sales up for grabs for the relevant categories" from the Sports Chalet liquidation and "an additional $832mm sales assuming TSA was down 10% over the last 12 months from a $2.6b run rate at peak."

"If we assume BGFV picks up 5% of the roughly $1.08b market share opportunity, a relatively conservative estimate in our view, that would add $56mm over the next six quarters or 6% to BGFV's current LTM sales base," Baker wrote in a note.

Meanwhile, Big 5's merchandise margins should benefit from less promotional activity and a favorable mix shift. The analyst increased his 2016 and 2017 operating margin estimates to 2.3 percent and 3.3 percent from 2.0 percent and 2.5 percent. Consensus is at 2.1 percent and 2.4 percent.

As such, the analyst raised his back half 2016 comp estimates to 6 percent from 3.5 percent and 2017 to 4.9 percent from 2.2 percent. The analyst's full year 2016/2017 comp estimates of 2.4 percent and 4.9 percent compares to Factset consensus of 1.2 percent and 1.8 percent, respectively.

In addition, Baker raised his EPS estimates to $0.62 and $0.99 from $0.52 and $0.68 for 2016 and 2017, respectively. The analyst also upped the price target to $16.50 from $10.

"Beyond 2017, we believe BGFV's top line will continue to benefit as the company receives better allocations from vendors looking to replace lost costumers," Baker noted.

At time of writing, shares of Big 5 climbed 10.74 percent to $15.36.