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Has Dick’s Sporting Goods Peaked?

March 28, 2012 | About:
With consumer confidence on the rise and the economy steadily improving, it’s a good time to start looking at retail stocks again. There are so many sectors and so many companies that it can be hard to choose a winner. Often we look at previous sales and earnings trends to help us decide. We can also look into the financial health and evaluate the cash on hand and value of a company versus debt and other liabilities. Management, for me, can also be a huge factor. If there is incompetent leadership at the helm then I, like most others, will steer clear. A strong management team in place, on the other hand, will attract me to at least consider a stock. When looking at retail picks there is one other major consideration. I will always try to rationalize a prediction based on consumer trends. What are they going to be into next? What is the next market that will see growth?

For me there is one company now that meets all of the criteria I am looking for in a retail stock. Dick’s Sporting Goods (DKS) has been posting solid financial numbers and avoided real harm during most of the slow times retailers saw with a faltering economy. Even though the company has had a big run up in its stock price, it could still be a good buy for a long term hold. It has recently been trading near $48 and has been on a steady increase, but with good reason. They have pushed through the difficult times and have consistently pleased the analysts and investors with their numbers.

This quarter (January 2012) earnings were a little off coming in at $0.76 instead of $0.88, however, analysts remain positive that the company will continue to see growth. Earnings are expected to come in at $2.42 this year and $2.78 next year which is a healthy gain from the past year’s earnings of $2.02. Revenue is also expected to grow accordingly from the $5.2 billion it reported in the last fiscal year to $5.76 this year and $6.26 next year. With strong sales and good management the company continues to improve while it still hasn’t realized its full potential yet.

Dick’s is a specialty sports store whose major competitor in the U.S. is The Sports Authority which is owned by a private equity firm. Sports and fitness is a huge market and with the obesity problems facing Americans it has the potential to continue increasing. We are constantly hearing about weight and health issues due to lack of exercise. The schools are trying to combat the problem by getting children to be more active and parents are also slowly taking notice. As the population grows and people also become more aware of the benefits of getting exercise and the risks of not getting any, the potential for increased sales of sporting goods and apparel grows.

Dick’s currently only has about 480 retail stores in 40 states and 80 Golf Galaxy stores. It also operates an online service, which has recently been seeing positive growth. The company still has much room within the U.S. to expand and hasn’t even set foot in other countries. An easy first move for the company would be to open up stores in Canada and then move on to other nations that are heavily involved in sports and outdoor life.

Dick’s clearly has room to grow and is the dominant player in the American specialty sports market. Many people are beginning to think that it has reached its peak for now and they also believe it will have a pullback. It’s of course possible that it may have a pullback; however, long-term projections look good and current numbers are positive for the large specialty retailer. Dick’s current market capitalization is approximately $5.8 billion while valuation is over $5.2 billion. The company’s trailing price to earnings ratio is 22.78 while the forward looking price to earnings ratio is 17.21. Return on equity is 17.6% and debt to equity is 9.74. The 200 and 50 day moving averages are $38.90 and $44.29 respectively. The stock has been increasing steadily and has a current median target price of $53. With the new dividend payouts in addition to the upside potential in stock price Dick’s could be a good long term investment. As always, do your own due diligence. I currently have no position in the company and don’t plan to take one within the next 72 hours.

Points to consider:

· A recovering economy favors specialty retailers like Dick’s.

· Analysts are predicting steady growth and earnings.

· Lots of potential for the company to grow both internally and internationally.

· eCommerce business is healthy and growing.

· Stock is still more than 10% under its mean target price.

· Steady uptrend.

· Stock has made large gains this year and could see a pullback before moving on.

About the author:

InvestmentUnderground
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