I think the Catapult Group International Ltd (ASX: CAT) share price is ripe for the picking.
Let's run Catapult Group through the Warren Buffett and Charlie Munger four-part investing checklist.
1. An investor must be capable of understanding the business
Catapult is a $311 million Melbourne-based sports technology business. The company has two primary divisions/product segments:
- Wearables, which includes GPS-like devices that professional sports people wear to monitor endurance, injury and for gameplay.
- Video Analytics, which includes the development of digital and video analytic software for elite sporting teams and broadcasters. This business was recently purchased via the acquisition of XOS.
With the acquisition of PLAYERTEK, Catapult is also exploring the 'prosumer' market, which targets non-professional types with GPS devices of limited functionality. This is a big market, estimated by management to be 10 to 20 times the size of the professional market.
As can be seen, Video Analytics is the primary revenue generator. However, it is a newly acquired business. Also, the Wearables business reported 50% revenue growth between December 2015 and December 2016.
When it comes to margins, Wearables generate operating profit (EBITDA) margins in the mid-teens. The Video Analytics business generates margins around 37%. However, gross profit margins are much more attractive for the businesses and are arguably a more accurate reflection of the company's compelling economics.
The company makes most of its money from the USA, with all Video Analytics revenue coming from North America.
Some of the world's most prestigious athletes use Catapult software (think: Golden State Warriors, Real Madrid, the Australian cricket team), with 67% of GPS units now sold on a subscription basis.
Looking towards the near future, the company will be able to release bolt-on features for professional sporting teams, with scaling increases to profit.
It is worth noting that Catapult's devices cost these teams a pittance (maybe $US2,000 per year) per athlete. When the athletes are 'worth' tens — if not hundreds — of millions of dollars, it's a no-brainer for the coaches to use Catapult's GPS devices and take all the features they can get.
What's more, with the Video Analytics division, Catapult is exploring ways for broadcasters, sports fans and sports betting companies to integrate the on-screen player data. XOS is the number-one business in its global market by revenue.
Ultimately, I'd say that most investors are capable of understanding Catapult's business.
2. The business must have a durable competitive advantage
Catapult has competitors. However, it is the leader and a first mover in its key markets, meaning that its products are 'the' products for professional teams. In the prosumer market, Adidas and Under Armour have toyed with Wearable technologies but failed to nail the proposition.
In the Video Analytics market, there are many reasons why broadcasters would seek the number-one provider of sports data, including unrivalled access to the best teams and players. For example, if they want video analytics on Cristiano Ronaldo from Real Madrid, they'll need to use the company that has his performance information – Catapult.
There are competitors and technologies which are evolving rapidly. However, with its first mover advantage and a holistically integrated suite of products, Catapult's competitive position is strong.
However, I wouldn't say it is a durable advantage just yet.
3. Management must have integrity and talent.
To assess this measure, I look primarily at two things: management tenure and skin in the game.
Adir Shiffman is Catapult's Chair and experienced in technology start-ups. He joined the company in 2011 and owns many shares. Joe Powell is CEO, having joined from SEEK Limited (ASX: SEK) earlier this year. Shaun Holthouse is a founder and currently Global Head of Strategy. Igor Griendt is another founder with loads of shares. Finally, Director Calvin Ng is an investment banker with heaps of shares to his name through a holding company. All-in-all, I estimate the management team own around $140 million in the $311 million company and are deeply experienced.
The head of Catapult's Video Analytics business, XOS, is Matthew Bairo, who has been with the company for 16 years.
4. No business is worth an infinite price
Catapult is not an easy company to value because it is a relatively early stage business and sensitive to forecasts. However, the company's share price has fallen from over $4 to a recent low of $1.56 (it is now around $1.92) — in less than a year.
Before the fall, a lot of growth and expectation must have been assumed by investors, but now it seems to have a much more reasonable valuation.
As a bonus, consider that Catapult is a minnow operating in markets which have huge appeal to giant sporting goods companies (think: Nike, Adidas, etc.) and broadcasters.
Bringing it all together
Catapult is a small but growing company, is a first mover, with long-term management who have plenty of skin in the game, many ways to grow and a beaten down share price.
While it is a higher risk, it's a buy in my book.
