DA Davidson Upgrades Black Diamond To Buy, Says 'Valuation Well Below Full Potential'

The core brand of Black Diamond Inc BDE is approaching positive inflection, with gross margin expansion expected to restore profitability, DA Davidson’s Andrew Burns said in a report. He upgraded the rating on the company from Neutral to Buy, while raising the price target from $4.50 to $6.

Black Diamond faced a challenging onshoring process that significantly impacted its gross margins, while also dealing with a recall on five products for inspection. Analyst Andrew Burns commented that “management's intense focus on this matter” seems to be generating results, with the company having resumed adequate production levels and achieved improved product quality testing.

Related Link: Black Diamond Misses EPS Estiamtes, Beats Sales

“With revenue stabilized and SG&A expenses right-sized, we believe gross margin improvement can restore profitability,” Burns wrote.

Valuation Low

Black Diamond’s current share price implies a valuation of $60 million for the company’s core brand, which is significantly below acquisition price.

“BDE acquired its namesake brand in 2010 for $86 million and PIEPS for $13 million in 2013. Combined these companies generated ~$100 million the year they were acquired. In 2016, revenue has grown to $145-$150 million (guidance), or $155-$160 million in c.c. terms, reflecting strong underlying demand for BD products,” the analyst stated.

Although the company has organic growth of more than 45 percent, the current market value is at a discount of about 40 percent to the $99 million purchase price. Burns expects valuation to improve as profitability is restored.

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