Dick's Sporting Goods (NYSE:DKS), Hibbett Sports (NASDAQ:HIBB), and Big 5 Sporting Goods (NASDAQ:BGFV) have all had decent years in 2013, yet have underperformed the Nasdaq as a unit. Although, compared to many retail industries, the sports space is growing quite fast. Therefore, which, if any, of these three stocks are presenting the most upside and value in 2014?

Same businesses with slight differences
All three of these companies operate in the same space, selling sporting-goods merchandise in retail stores.

Dick's is the largest, carrying name-brand sporting apparel, fitness equipment, and footwear. Moreover, Dick's stores are the largest within the industry, averaging nearly 30,000 square feet per location.

Big 5 is very similar to Dick's, selling many of the same items. However, Big 5 stores operate at about one-third the size, at 11,000 square feet per store.

Hibbett Sports focuses on apparel and some athletic equipment. With more than 800 stores, Hibbett has the greatest presence but the smallest stores at just 5,000 square feet.

A growing industry
So, while looking at these three companies, one might wonder which is the best value or your best opportunity to capitalize on both growth and valuation.

First, let's look at the growth of these three competitors.




Big 5

2013 full-year growth




2014 growth estimates




2-year growth*




*Growth from 2012 to 2014 expected full-year sales.

As you can see, Big 5 has been the clear growth winner in 2013. The company has grown same-store sales faster than its peers, and as a result, it has outperformed both Dick's and Hibbett by a ratio of 2 to 1 in terms of stock performance.

However, next year both Hibbett and Dick's will have greater growth than Big 5, and if we look at total growth over a period of two years -- using estimates for 2014 -- then Big 5 is the laggard of the group.

With that said, all three companies have impressive total growth, with double-digit performance. And since a company's valuation is determined by looking at both current fundamentals and future expectations, using a formula with both might be the best way to determine upside and assess valuation.

Different levels of efficiency
Next, it's worth noting that there is a large disconnect in the operating margins of these three companies.




Big 5

Operating Margin




As you know, margins are what ultimately create profit, which is what metrics such as a P/E ratio are derived from.

Clearly, there is a large range in the difference in margin of these companies. With that said, some might suggest that the margin differential can be traced back to the size per store, as Hibbett has the highest margin and smallest square footage per store. Yet if this were the case, Big 5's margins would be higher than Dick's.

Instead, it is most likely that margins are a reflection of the effectiveness of each business, showing which companies have made the best investments. This theory is validated with the following table, showing each company's return on equity.




Big 5

Return on Equity




A company's return on equity shows what a company is making or profiting from invested money. Thus, it shows effectiveness. However, while some may view Big 5's lower margin and return on equity as a sign of weakness, the company's last year suggests that it's a point of strength or room to improve.

Here's one more interesting chart:




Big 5

2012 operating margin




We already looked at operating margins for the last 12 months, but when you look at each company's operating margin in 2012 and then compare it to current margin, you can clearly see which company is improving most.

Hibbett, with its industry-high margin, has seen a modest decline year over year, and Dick's has seen a slight improvement. However, Big 5 has improved its margin by nearly 70% in just one year, and even more impressively, it saw a 30% improvement from 2011 to 2012.

Therefore, with these three companies selling mostly the same products, we as investors have to assume that under the right circumstances, peak margins for this industry are about the same for each of these companies.

Hence, Hibbett has the most to lose, and Big 5 has the most to gain.

So, which is best?
With all things considered, we can state a few facts:

Dick's is seeing the greatest growth over a two-year period and has some room to improve profitability. Thus, it's likely a good investment.

Hibbett is growing impressively, but has the most to lose with margins and profitability, making it a risky investment.

However, Big 5 is somewhere in the middle, having double-digit growth, strong same-store sales gains, and the most room for margin improvement. Now, considering the fact that it earns less profit per $1 of revenue, we already know that a P/E ratio would be an unfair metric of comparison due to the disconnect in profitability within the space.

However, with Big 5 having margin growth opportunities, investors should be appalled by the fact that it trades at just 0.4 times sales! In comparison, Dick's and Hibbett trade at 1.2 and 2 times sales, respectively. Hence, Big 5 trades at 20% to 40% the multiple of its peers but has the most upside and very comparable growth.

Moreover, Big 5 pays a forward yield of 2.1% versus no dividend for Hibbett and 0.9% for Dick's. Thus, Big 5 definitely appears to have the best risk/reward ratio, being the cheapest, paying a dividend, and improving at a rapid rate. Therefore, despite all of these companies growing, Big 5 looks like a surprising value within the space, and the best option for 2014.

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Fool contributor Brian Nichols owns Big 5. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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