Should You Take a Swing at Dick's Sporting Goods?

Shares of Dick's Sporting Goods collapsed 18% after its first-quarter results, but it seems the market overreacted. Here's why.

May 26, 2014 at 8:00AM

With Major League Baseball in full swing and the NHL and the NBA in the midst of their respective playoffs, it might be a good time for you to consider stocks that make big money from sports. While sports and stocks might not seem like a match, avid sports fans have good reason to consider investing in companies that profit from the great outdoors.

Unfortunately, Dick's Sporting Goods (NYSE:DKS) released a dud of a first-quarter earnings report, which calls into question whether, from a business perspective, the outdoors are all that great. Dick's specializes in two specific areas, golf and hunting, which both contributed negatively to the company's disappointing results. The harsh winter weather has taken a severe bite out of spring sporting activities. These same conditions hit Cabela's (NYSE:CAB) in its first quarter.

However, it's premature to write off Dick's entirely. The stock collapsed 18% after its earnings report, but that seems to have more to do with unreasonable expectations rather than a true deterioration of the company.

First-quarter results were not as bad as the market's reaction
Often in the stock market, companies that demonstrate solid growth catch the attention of Wall Street analysts. Those analysts are quick to heap praise on these types of companies, often to the point where it becomes unproductive. Dick's Sporting Goods generated strong growth over the past few years; in response, analysts lavished increasing price targets on the company. That game rarely ends well, and now it's claimed another victim.

Dick's posted 4% growth in adjusted earnings per share along with 1.5% growth in same-store sales, which measure sales at locations open at least one year. As you can see, there's nothing alarming about results like this. In fact, it's markedly better performance than Cabela's, which posted a 9% drop in first-quarter revenue.

The reason for this is that Cabela's is even more reliant on hunting and firearms than Dick's. Cabela's saw strong guns and ammunition sales in the first quarter of 2013, making for an extremely tough comparison period this time around.

Hunting was an area of weakness for Dick's too, but so was golf. The harsh winter weather clearly had a lot to do with this and will hurt the company's full-year results as well. Dick's management lowered its 2014 forecast in light of its first-quarter results. The company expects to earn $2.77 per share, at the midpoint of its guidance, down from previous expectations which called for $3.05 per share in earnings.

While this is undoubtedly a disappointment, Dick's guidance still represents growth over the previous year. Dick's earned $2.53 in diluted EPS last year; so assuming it hits its new forecast, it will still produce 9% earnings growth this year.

The reason for Dick's huge sell-off after earnings were reported probably had more to do with where the stock was trading leading up to the results. Dick's traded for 21 times trailing earnings prior to its huge decline, a lofty level for a retailer that meant the stock was nearly priced for perfection.

And, considering the tepid results seen from retailers more broadly so far this year, it's clear that retailers have been hurt by the unseasonably cold weather. After the sell-off, Dick's now holds a valuation that is much easier to swallow. The stock now exchanges hands for about 17 times trailing EPS, closer to the market multiple.

The Foolish takeaway
It's irrational to think people suddenly stopped golfing and hunting entirely. More likely is that the brutally cold winter weather that persisted well into March and April in many parts of the country simply postponed these traditional warm-weather activities.

Wall Street should have anticipated this and lowered its earnings estimates before Dick's Sporting Goods reported quarterly results. From a fundamental perspective, there's nothing wrong with Dick's business model. The company is still growing and is highly profitable.

The only things wrong with Dick's were its valuation and sky-high expectations embedded in its earnings multiples. With the huge earnings-related sell-off and harsh winter behind it, Dick's Sporting Goods looks like a good value opportunity based on its modest valuation and prospects for continued growth in 2014.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.


Bob Ciura has no position in any stocks mentioned. 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information