Dick's Sporting Goods is one of the best undervalued stocks
- Recently, due to the pandemic, many sporting goods stores have struggled to make money, and the sector is expected to bounce back this year.
- Dicks was one of the “lucky” few to report a profitable year. However, Dicks did not just have a profitable year, they were able to have an incredible year and impress investors by beating estimates by a long shot.
- As a result of their recent successes, I have decided to look into Dick's and find out if it is a good investment, and if they can keep outperforming their industry competition.
- According to my valuation techniques Dicks is undervalued and has the potential to grow.
- By following the plan set out in this report, if everything goes to plan, the potential return of an investment into Dicks will be 23.77%.
- There are risks to every investment, these risks are highlighted at the end of the report.
- Along with the risks, there are several catalysts that are also listed at the end of this report.
Founded in 1948, Dick's Sporting Goods is a leading sporting goods retailer in the USA that offers high-quality equipment, apparel, footwear, and accessories to their customers. Currently, there are 730 Dick's locations across the USA, and own/operate 125 Golf Galaxy, and Field & Stream stores (also in the USA).
Dick's goal is to create confidence and excitement by equipping their “athletes” (customers) with the necessary equipment to enjoy their sporting experience.
COVID-19 had a negative impact on the sporting goods and sportswear industries. However, some companies were able to perform well due to their ability to change their operations to fit around COVID (ie. Online DTC, curbside pick-up etc.). The companies that were able to adapt the quickest and most effectively were the ones that succeeded big time. Fortunately, Dicks already had an E-Commerce presence, but due to the pandemic were able to focus on this channel more and further develop their online store to be one of the best. Dick's was able to grow their online sales by 100% YoY due to the pandemic and their increased focus on their eCommerce store.
Due to the pandemic, many sports leagues were closed down, as people were advised to stay at home. Although this was not favourable for sporting good companies, there was an increased participation in home workouts and increased demand for activewear. This helped companies to offset their losses in sporting goods and perform well financially during the pandemic.
Although this industry was hit hard, they are expected to bounce back very quickly as the world starts to open back up again. This industry is expected to grow 14.7% this year, and 7% yearly until 2025. However, as we know, Dick's performed well last year, and I expect them to outperform other companies as the USA starts to reopen.
State of the sporting goods industry 2021 | McKinsey
Outlook on the Sporting and Athletic Goods Global Market to (globenewswire.com)
- Financial Performance (Good): Over the past year Dick's has been able to increase their revenues by 9.5%, while only exhibiting an increase in the cost of revenue of 5.44%. This helped to increase Dick's gross profit by 19.42% and increase their net income by 78.26%. Furthermore, Dick's was able to increase their profit margin to 31.8% (from 29.2%) and increase their operating income by 97.60%. This financial performance is fantastic and gets investors excited about future financial performances and potential future expansion.
- Financial Performance (Bad): Over the past year, Dick's has increased their interest expense by 186.93%, which is a lot, and is a result of them taking on 85.19% more debt. It is not good to see them taking on this much debt. However, they should be able to pay off their debt as their current and quick ratios are good.
- Share Repurchase Program: On June 12th, 2019, the board of directors approved a 5-year share repurchase program, that authorizes over $1B of funds available to repurchase shares. If these shares were all to be purchased (assuming their current price of $95.01), they would be able to purchase 10,525,208 shares over the next 3 years, which would increase the value of existing shares by 12.79% Knowing this we can expect 292,367 shares to be purchased each month, increasing the value of existing shares by roughly 0.33% per month.
- Opening Stores: In 2020, Dick's was able to add 2 of their own stores and 2 of their specialty concepts stores to their total number of stores open. The fact that they were able to add new shares during the pandemic is a good sign given the fact that retail stores did not perform very well in 2020. It will be interesting to see this year's number of new stores given the re-opening of the country and getting things “back to normal”.
- Liquidity: Dick's has increased their cash and cash equivalents position by 2292.64% to $1.66B. This huge cash position should help them to be able to meet short term cash and interest requirements. It would be nice to see them use some of this cash to expand operations and try to grow rather than their cash sitting idle, however it provides a safety net, which will draw in investors.
- Convertible Shares: Currently, Dick is has a total of 849,000 possible shares that are not yet issued and will be issued if their instrument(s) are converted. If all of these shares were to be converted, it would cause a dilutionary effect of 0.95%.
- Equity Compensation Plan: Under Dick's equity compensation plan they have 4,352,896 shares that are yet to be issued through the exercise of warrants, rights, and options. Additionally, they have 848,800 shares in actual common shares that are yet to be issued. Totalling these two figures arrives at a total of 5,201,696 shares that are yet to be issued under their plan. However, if these shares were to be issued it would cause a dilutionary effect of 5.83%.
Dicks owns a number of their own brands which they sell alongside their partnered brands. These vertical brands include:
- Top Flite
- Fitness Gear
- Walter Hagen
Corporate Social Responsibility:
According to the US Forum for Sustainable and Responsible Investment, the total Assets-Under-Management (AUM) for ESG companies increased by 42% over the past two years.
ESG stands for Environmental, Social, and Governance, and companies labelled as “ESG” have social missions and aim for equality in the workplace. People who are investing into these types of companies are said to be sustainable investors. Knowing that this type of investing is growing quick can be good for companies like Dick's who are constantly looking for ways to be more responsible.
What Dick's has already done:
- Dicks has already diverted 29,000 pounds of plastic waste from landfills and oceans via their partnership with First Mile.
- Dicks has reduced their (scope 1&2) GHG emissions by 28%.
What Dick's is planning to do:
- 2021 Goals: Maintain their gender pay ratio of 100%. This means that they pay men and women the same for the same roles in the company no matter if it is a member of management or an employee.
- 2024 Goals: By 2024, Dick's plans to donate enough money and merchandise so that they can give over 1,000,000 kids the chance to play sports.
- 2025 Goals: By 2025, Dicks plans to eliminate all single-use point-of-sale plastic from all of their stores nationwide. Furthermore, Dick's is also planning to meet disclosure standards their Human Rights Watch Transparency Pledge for all of their vertical brands.
I found Dick's WACC to be 10.30% on a website called Finbox. On this site, they estimated Dick's WACC to be 10.30%, which I used in my comparable.
I found Dick's EBT CAGR through taking the average annual growth rate in EBT over the past 4 years. By doing this, I arrived at a CAGR for Dick's of 12.85%
I found Dick's effective tax rate in their SEC 10-K filing. In this document it stated that Dick's effective tax rate for 2020 was 25.5%, which I used as a constant throughout my DCF.
In order to undergo a proper comparable analysis, I chose 4 other companies that have operations, geographies, market caps, and business models similar to Dick's, my search for these types of companies lead me to finding the following 4 comparable stocks:
$ASO - Academy Sports & Outdoors Inc., $BGFV - Big 5 Sporting Goods Corp., $HIBB - Hibbett Sports Inc., and $FL - Foot Locker.
In order to value Dick's Sporting Goods, I underwent a DCF model and 3 comparable analyses.
The information that I used to conduct my DCF model can be found in the “valuation information” section of this report.
Through conducting my DCF model, I found Dick's fair value to be $128.78, which would imply an upside of 36.75%. This is reasonable, yet somewhat high, thus I needed more information to base a valuation off of, which is why I underwent the comparable analyses.
In order to undergo this analysis, I compared Dick's financial ratios to that of their public competitors (found above in the “competitors” section).
By undergoing this comparable, I was able to find the fair value of Dick's to be $97.27, which would imply a share price increase of 3.29% from current prices. This supports the argument that Dick's is undervalued, however this comparable argues that Dick's is undervalued by far less than the DCF estimates Dick's to be.
These comparable estimates the fair value of Dick's to be $88.88, which would imply a share price decrease of 5.62%. Unlike the previous 2 valuations, this comparable argues that Dick's is overvalued, so I decided to undergo one more comparable to get a final verdict.
By undergoing this comparable, the fair value of Dicks was estimated to be $104.33, which would imply a share price increase of 10.79%. This supports the fact that Dick's is undervalued, however I decided to take the average of the comparable to get one final comparable price target.
By taking the average result from the 3 comparable analyses underwent, I arrived at one final estimate of $96.83/share. This indicates that Dick's is slightly undervalued and presents a good buying opportunity.
Based off of the valuation techniques underwent in this analysis, I was able to formulate a plan on how I would play this.
Buying Dick's between its current price ($94.17) and the average comparable price ($96.83), would be a great buying opportunity and help to limit the downside risk of such an investment.
If the price falls below $93, I will sell my position and look for a re-entrance at the $88.88 level.
I would consider selling half of my position at $104.33, and the other half if the price reaches $128.78.
- Share Dilution: Dick's has a couple different forms of dilution that investors need to watch out for. These include convertible shares and equity compensation plans. Together, these two forms can account for a maximum share dilution of 6.78%. However, this dilution may be offset by their repurchasing. Lastly, this level of dilution is not of much concern for a company that is growing as quick as Dick's Sporting Goods is.
- Financial Performance: despite the global pandemic, Dick's was able to have a fantastic financial performance in 2020. They increased their revenues, margins, profits, and income during this period, which cannot be said by many other sporting good companies. Dick's great [performance amidst uncertainty and poor retail conditions sparked my interest and the interest of many other investors who think that Dick's can continue their great performances.
- Share Repurchase: As previously mentioned, Dick's can repurchase up to $1B in shares. If they were to do this, they would increase the value of existing shares by 12.79%. This would be fantastic for investors, however, even if they only repurchase half of the available shares, they would still be able to offset their total dilution as mentioned above. Just knowing this is great news for investors, however we need to be alert and tracking them repurchases to determine how many shares they are purchasing every month to see if they are meeting expectations.
- Social Responsibilities: As mentioned previously, many people are turning to ESG and socially responsible investing. The fact that this type of investing is growing as quickly as it represents an opportunity for Dick's to attract investors and increase demand for their shares. If they meet the targets, they set out and perhaps set new and more ambitious ones, they will be drawing in more potential investors, which should drive their prices higher.