Climbing K2

• Email
• Share
• Print

With Americans getting less and less active (one report said more than a quarter of us exercise less than 10 minutes per month), times might look tough for companies selling sports equipment.

Not so. Sports powerhouse K2 (NYSE: KTO) released earnings yesterday that show we continue buying this stuff, even if we're not using it.

K2, which is best known for its eponymous ski and snowboard equipment, also produces gear for baseball, fishing, cycling, water sports, in-line skating, and snowshoeing under familiar brands such as Rawlings, Shakespeare, Stearns, Tubbs, and Atlas. For both the fourth quarter and full-year 2003, K2 posted solid sales growth at 51.8% and 32.4%, respectively. Some of that was powered by acquisitions earlier in the year, like the purchase of Rawlings.

Of course, sales increases are nothing if you can't follow through to the bottom line. (See Huffy's problems for a cautionary tale.) But K2's earnings look healthy, even factoring in big increases in interest expenses and the dilutive effects of convertible debt.

This year's Q4 earnings were up 133% to $0.07 a share. That number was buoyed by a penny of unusual gains, but still beat earlier guidance of a nickel. For the whole year, earnings reached $0.44 per share. Because of restructuring and acquisitions, there were unusual gains, charges, and dilution baked into that number, too. Accounting for these, K2 came in $0.03 per share better than management had guided.

For the upcoming year, management's looking for a 29% increase in revenues, to $925 million, and earnings around $0.81 per share, assuming full conversion of the convertible debt. That might be tempting, as it puts the firm at a forward P/E of 22 at today's prices. But the company, while looking strong, is no A-list juggernaut like Nike (NYSE: NKE) or Reebok (NYSE: RBK).

And since K2 carries $216 million in debt -- 10 times more than its cash stash -- savvy investors will need to see the rest of the numbers before deciding on this one.

Talk sports gear and methods on the Foolish Fitness discussion board.

Motley Fool contributor Seth Jayson gave up snowboarding when his receding hairline impaired his mohawk. He has no stake in any company mentioned above.