The Next Great American Sports Superstar

This article is part of our Rising Star Portfolios Series.

Dick's Sporting Goods (NYSE: DKS  ) has been on my watchlist for some time now. I've played sports all my life, and their "store within a store" concept is a real winner. But Hibbett Sports (Nasdaq: HIBB  ) is another name in this sector keeping things competitive.

Granted, Dick's has a market cap about four times that of Hibbett, but often smaller companies are able to provide a standard of service that levels the playing field. On the flip side, scale and distribution can be game winners when it comes to specialty retail. By taking a look at a few common ratios over time, we can get a better idea as to which company may be the better bet.

Return on equity
Warren Buffett likes looking at a company's return on equity because it is a key indicator as to not only how profitable the business is, but also how well the company's assets and leverage are being managed. Think about it this way: A company earning $1 million in a given year on $5 million in shareholder's equity is doing a better job than another company earning $1 million on $20 million in shareholder's equity. This is what return on equity tells us. So how do Dick's and Hibbett measure up here? Let's take a look:

Company

TTM

2010

2009

2008

2007

5-Yr. Avg.

Dick's

14.5%

13.7%

(4.5%)

20.0%

21.8%

13.1%

Hibbett

26.2%

20.9%

23.0%

23.7%

29.1%

24.6%

Source: Capital IQ, a division of Standard & Poor's.

Based on the averages here, Hibbett knocked it out of the park. And what's the deal with the negative ROE for Dick's in 2009? Well, it looks like an impairment on goodwill was the culprit, so I can cut 'em a little slack.

Operating margin
When we talk about margins, a good one to focus on is the operating margin, also known as the EBIT margin (earnings before interest and taxes). These are the earnings that take into account the company's operating expenses and this can tell us how much the company is spending to operate the business. I mean, let's face it, earning $1 million isn't going to mean much if it costs you $950,000 to do it. So how do these two compare? Here are the figures:

Company

TTM

2010

2009

2008

2007

5-Yr. Avg.

Dick's

5.9%

5.3%

5.8%

6.9%

6.3%

6.0%

Hibbett

11.1%

8.8%

8.5%

9.3%

12.1%

10.0%

Source: Capital IQ, a division of Standard & Poor's.

Again, Hibbett is the victor since it is able to produce better operating margins. Interestingly enough, Wal-Mart's (NYSE: WMT  ) average of 5.9% is lower than both. Given Wal-Mart's scale and global reach, it's a formidable competitor to both companies.

Free cash flow margin
Finally, I like to take a look at the free cash flow margin. While slightly more involved, it can really shed light on what the company is actually making once it is all said and done. Free cash flow is one of our favorite numbers to look at. Simply defined as cash flow from operations less capital expenditures, free cash flow is that money that is left after all of the bills have been paid. It is the money that the company can return to shareholders in one fashion or another -- be it in the form of dividends, share buybacks, or even reinvesting in the business. The free cash flow margin is a comparison of the free cash flow the company is generating to its revenues. Let's see how the two match up:

Company

TTM

2010

2009

2008

2007

5 Yr. Avg.

Dick's

2.5%

5.9%

(1.4%)

2.3%

(0.8%)

1.7%

Hibbett

8.2%

4.6%

4.5%

6.1%

3.9%

5.5%

Source: Capital IQ, a division of Standard & Poor's.

A pretty significant difference here: It's Hibbett -- game, set and match.

A new watchlist candidate?
All things being equal, when we consider these three metrics in assessing both businesses, I give Hibbett the edge here as it bests Dick's in all three categories. While these aren't the only metrics to consider when assessing a business, they can provide a good starting point for further research. Both are quality businesses and worthy of consideration, but Hibbett may have just earned a spot on my watchlist as well. Agree? Don't agree? Swing on by my discussion board and let's talk. You can also follow me on Twitter.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here. 

Stock Advisor analyst Jason Moser owns no shares of any companies mentioned in this article. Wal-Mart Stores is a Motley Fool Inside Value pick. Wal-Mart Stores is a Motley Fool Global Gains recommendation. The Fool owns shares of Wal-Mart Stores. 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.


Read/Post Comments (1) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 28, 2010, at 3:33 PM, madmilker wrote:

    me!

    Remember everyone....

    Please join US on the first day of Chinese New Year...

    沃爾瑪抵制被中國人。

    thanks!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1412103, ~/Articles/ArticleHandler.aspx, 9/22/2014 4:30:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement