The stock of Dick's Sporting Goods (NYSE:DKS, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $87.62 per share and the market cap of $7.8 billion, Dick's Sporting Goods stock is estimated to be significantly overvalued. GF Value for Dick's Sporting Goods is shown in the chart below.
Because Dick's Sporting Goods is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 9% over the past three years and is estimated to grow 1.23% annually over the next three to five years.
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Dick's Sporting Goods has a cash-to-debt ratio of 0.53, which is in the middle range of the companies in the industry of Retail - Cyclical. GuruFocus ranks the overall financial strength of Dick's Sporting Goods at 5 out of 10, which indicates that the financial strength of Dick's Sporting Goods is fair. This is the debt and cash of Dick's Sporting Goods over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Dick's Sporting Goods has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $9.6 billion and earnings of $5.46 a share. Its operating margin is 7.74%, which ranks better than 74% of the companies in the industry of Retail - Cyclical. Overall, the profitability of Dick's Sporting Goods is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Dick's Sporting Goods over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Dick's Sporting Goods is 9%, which ranks better than 77% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth rate is 18.8%, which ranks better than 72% of the companies in the industry of Retail - Cyclical.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Dick's Sporting Goods's return on invested capital is 11.24, and its cost of capital is 9.17. The historical ROIC vs WACC comparison of Dick's Sporting Goods is shown below:
In short, the stock of Dick's Sporting Goods (NYSE:DKS, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 72% of the companies in the industry of Retail - Cyclical. To learn more about Dick's Sporting Goods stock, you can check out its 30-year Financials here.
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