SUMMARY
The company Name is Dick Sporting Goods with its stock ticker DKS trading in the indexes. The company of 30300 employees is headed by the Chief Executive Officer Edward W. Stack, Chief Financial Officer Lee J. Belitsky, Vice Chairman, and director William J. Colombo.
The analysis of the valuation of the company has resulted in a “hold” recommendation. The 12-month target price is set at $35. The company is currently trading at $ 32 as of May 17, 2018. The company intrinsic value as per the DCF analysis is found to be $ 40 showing the undervalued by the market. The company historically has a reputation of paying constant dividends even with high investments. The company financial information shows that it has reported a profit margin of 4%, which is lower than its last five years. The company ratio analysis has shown its strong financial position regarding liquidity, solvency, efficiency, and asset utilization.
COMPANY DESCRIPTION
Dick Sporting Goods, Inc is considered a leading multi-channel sporting goods retailer who offers an extensive variety of high quality, authentic sports apparel, equipment, accessories, and footwear. The company provides this service through the use of in-store services, dedicated associates, and specialty shops. The company is located in Pennsylvania and considers focus on its customers, being an authentic sporting goods retailer by capturing of the displaced share in the market, and through driving Omni-channel growth via differentiation strategy as its key business strategies. It operates as a retailer of sporting goods primarily in the eastern United States. The company also provides hunting and fishing gears. It also owns the Golf Galaxy, and Field and Stream and similar specialty stores. The company also operates through its e-commerce website and the Dick’s Team Sports HQ proving management services free for leagues, mobile apps, custom uniforms, access to sponsorships, and fan wear (DICK’S Sporting Goods Inc).
INVESTMENT THESIS
This paper is intended to look at the stock of dick’s Sporting Goods for its valuation through Peer Group analysis, competitive analysis, ratio analysis, DCF valuation, and Relative Price Comparison. The paper will evaluate if the company is undervalued or overvalued. It will result in the recommendation of Buy, Sell or Hold decision.
KEY RISKS
The company is operating in the Consumer Discretionary Sector and the Specialty Retailers Industry. The industry segment in which it operates is a highly sensitive segment to the consumers’ confidence and they also to the business cycle and will remain sensitive to the increase in the growth of the US economy from the 2008 financial recession. However, the industry is facing major maturity and is thus showing moderate level growth with the relatively high competition. The expansion in the traditional retail industry and the outdoor-focused retailers can become a risk for the company. The economic slowdown in the US can also become a threat.
After the announcement of banned sales of the assault-style rifles in response to the Florida gun shooting, the company has been receiving a mixed response from the market. There is a backlash from some segments, whereas others are praising. The impact of the announcement was also witnessed on other gun retailers as well. Their shares dropped after the announcement. The company stock, however, rose after the announcement; there is the threat of market backlash as well (Simply Wall Street Pyt Ltd).
Other than this, in January this year, the stock has seen unusual highs which have the market to be on risk alert. The company stock has historically been of high volatile nature. The company has been up by 12% and low of 23%, giving a return of -44% of its stock in the last six months. The company has HV2o of about 33%, which is significantly larger than that of S&P 500 Index (5.85%) and for other indexes (CMLViz).
COMPETITIVE POSITION
Dick Sporting goods operate DKS in the specialty retail industry segment of the sector consumer discretionary. The major company competitors in this industry are many, including the Sports Authority, Target, Wal-Mart, TJX Companies, etc. The industry of Dick’s Sporting Goods is a highly mature industry with many large and diverse competitors. The market of this industry is highly sensitive. The industry thus remains sensitive to the business cycle and consumer confidence. The key trends of this industry include the customer loyalty programs and the multiple retail channels. The company is very focused on high-end goods which limit the competition within the mass merchant and specialty retailers. The company advertising campaign on national level increases brand awareness. The company is relatively conservative but is trying to change. The increments in the fishing and hunting participants are continuously driving growth in the revenues (Market Realist).
FINANCIAL ANALYSIS
Historical Performance and Trends-Ratio Analysis
The ratio analysis of the company is conducted to evaluate the historical performance and trend analysis. The current ratio of the company has declined in the last five years but is still relatively better as it is more than 1. The company is capable of covering up its current liabilities by its current assets.
Current Ratio
The Return on Assets of the company has declined in the last five years. The company Return on Assets has declined to 8% from 11% in five years. This ratio shows that the company has not completely utilized its assets to convert it into profits.
Return on Assets
The Net Profit Margin of the company has also declined in the last five years from 5% to 4%. It can be attributed to the decline in sales witnessed because of the banning of the assault-style rifles.
Net Profit Margin
The Long-Term Solvency Ratios of Debt to Equity, Interest Coverage and Deb to Assets ratio shows the solvency of the company. The Debt-to-Equity ratio has surpassed the 1 margin and thus shows high dependence on debt financing. The Debt to Assets ratio shows that, however, the debt financing has remained lower than 50% in the past years, between 2017 and 2018; it has crossed the benchmark showing high debt dependency.
The interest coverage ratio has been more than 1 and is improved in 2018. It shows that the company can cover its debt by more than 1.5 times.
Long-Term Solvency Ratios of Debt to Equity, Interest Coverage and Deb to Assets ratio
The inventory turnover ratio is used to assess how well the company is utilizing its resources. The turnover ratio has been increasingly showing the high turnover of the inventory in sales inventory showing efficient operations.
Inventory Turnover Ratio
Similarly, the company receivable turnover has also improved showing the improved efficiency regarding converting its receivables into cash.
Receivable Turnover
Dividend
The company Dick Sporting Goods has been seen to remain to its dividends paying policy despite the heavy investments it has made. In 2017, the company has paid a dividend of $0.17 with an average of $0.68 annually. It shows 12% increase in the dividend per share as compared to 2016. However, this dividend yield is lower as compared to its peer group companies. Apart from this, the company has been following an extensive share repurchase plan. It has improved its earnings per share as well.
The company is a huge retailer in the market. However, the arrival of online companies and their subsequent prices has resulted in subdued profits for the retailers. Like all other traditional retailers, the company DKS is investing in the online channel and using the store for an improved meeting of customer demand (Market Realist).
Capital Structure
From the capital structure perspective, the company Dick Sporting Goods maintains a conservative capital structure with its dependence on the long-term debt keeping lower. The company seemingly aversion to debt has a long history behind it. The company is not focusing newly on this; the company has long remained far from any significant long-term debt. In the future as well, the company does not seem to have such plans. Even though the overall debt to equity ratio has risen, the long-term debt remains a small part of this debt. The following ratio of long-term debt to assets shows this fact (Tipranks.com).
| 2014 | 2015 | 2016 | 2017 | 2018 | |
| Total Long Term Debt | $ 377 | $ 485 | $ 578 | $ 731 | $ 837 |
| Total Assets | $ 3,071 | $ 3,436 | $ 3,559 | $ 4,058 | $ 4,204 |
| D to A Ratio | 12% | 14% | 16% | 18% | 20% |
The company has increased its debt portion from 12% to 20% in the last five years; still, it remains a small portion comparatively.
DCF VALUATION
The DCF Valuation is the type of valuation method which used an estimated of the attractiveness of the investment chance by using the expected future cash flows and then discounting these to its present values.
The calculations done below show the intrinsic value of the company Dick Sporting Good as per the Discounted Cash Flow Method for forwarding five years (Finance Yahoo).
| Data | |
| Discount Rate | 8.49% |
| Growth Rate/Rf Rate | 2.47% |
| Unlevered Beta | 0.78 |
| Risk Premium | 7.53% |
| tax rate | 2.70% |
| D/E | 1.91% |
| 5-year cash flow forecast | |||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Levered FCF (USD, Millions) | $ 235.50 | $ 259.40 | $ 279.17 | $ 209.00 | $ 281.00 |
| Present Value | $ 217.00 | $ 220.37 | $ 218.60 | $ 150.84 | $ 186.93 |
| PV for Five Yrs | $ 993.74 | ||||
Terminal Value=(FCF2022 x (1+g))/(Discount Rate-g)
| Terminal Value | FCF2022 x (1+g)/ (Discount Rate-g) |
| Terminal Value | $ 4,783.07 |
| PV of Terminal Value | $3,180.00 |
Equity Value=PV of next 5 Yrs FCF + TV
| Equity Value | |
| Equity Value | PV of next 5 Yrs FCF + TV |
| Equity Value | $ 4,173.74 |
Intrinsic Value= (Equity Value)/ (Shares Outstanding)
| Value | Equity Value/Shares Outstanding |
| Shares Outstanding | 104 |
| Value | $ 40.13 |
| Current Share Price | $ 32.70 |
| Current Discount | 18.52% |
Cost of Equity = Risk-Free Rate + (Levered Beta * Equity Risk Premium)
| Current Discount Rate | =Cost of Equity = Risk-Free Rate + (Levered Beta * Equity Risk Premium) |
| Current Discount Rate | 8% |
Bottom-Up Beta= Unlevered Beta (1+(1-tax rate) (Debt/Equity))
| Bottom-Up Beta | = Unlevered Beta (1+(1-tax rate) (Debt/Equity)) |
| Bottom-Up Beta | 0.79 |
Assumptions
- The risk-free Rate and the growth rate is assumed to be 2.47%, the rate of 10 Year Government Bond rate of USD.
- The levered or bottom-up bets are expected by analyzing the other companies of the similar industry
- The Risk Premium used is calculated by the using Market Risk Premium of 7.53% and subtracting the risk-free rate from it.
- It is known that the most important input in this model is the discount rate and the cash flows of the company. As the perspective of this computation is for equity investment in Dick Sporting Goods, the Equity Cost of Capital is used as the discount rate and not the WACC.
Sensitivity Analysis
| Sensitivity Analysis | |||||
| DKS | DCF Valuation | Valuation if Dropped | Valuation if Raised | ||
| 1% | 5% | 1% | 5% | ||
| Calculated Value | $ 40.13 | $43.49 | $24.85 | $79.36 | $83.93 |
| Discount Rate | 8.49% | 9.49% | 13.49% | 9.49% | 13.49% |
| Terminal Growth Rate/Rf Rate | 2.47% | 1.47% | -2.53% | 3.47% | 7.47% |
| WACC/Ke | 8% | 9.45% | 13.45% | 7.45% | 3.45% |
| Cash Flow | $ 993.74 | $968.17 | $875.12 | $1,020.76 | $1,140.54 |
The Sensitivity Analysis is done by calculating the impact of any devaluation or appraisal in the market inputs on the intrinsic value of the company. The four scenarios show the intrinsic valuation change if 1% and 5% drop the input values of Discount Rate, Terminal Growth Rate, and WACC and if the valuation is appraised to 1% and 5% (Morningstar).
In this first and second scenario, drop by 1% and 5% is shown by the rise in WACC and the discount rate by respective percentages, and a decline in Terminal Growth rate by 1% and 5% in respective scenarios. Similarly, in the third and fourth scenarios, the WACC is reduced by 1% and 5%, while 1% and 5% raise the Terminal Growth Rate and Discount rate (Yahoo Finance).
The results of valuation show that the Cash Flow declined in first and second scenarios and increased in the third and fourth scenarios.
Comparison of Bottom-Up beta with Yahoo Finance beta
The Bottom-Up best use the unlevered beta, which is published on the financial websites as well to calculate the levered beta. The difference between the two betas is visible in its numerical value and calculation. The beta value of Dick Sporting goods as per the Yahoo Finance is 0.06, whereas the Bottom-Up is approximately 0.8 which takes into account the tax advantages associated with the debt portion.
Bottom-Up Beta= Unlevered Beta (1+(1-tax rate) (Debt/Equity))
RELATIVE VALUE
For the relative value computation, the peer group companies’ multiples have been found and averaged to find the relative value of Dick Sporting Goods. The company has an overall relative value higher than that of its actual. It shows that the company is undervalued at this time by the market (Finance.yahoo.com).
| DKS | TJX | TGT | WMT | GPS | Index | Average | |
| Price/Earnings Ratio | $ 10.57 | $ 20.56 | $ 14.14 | $ 26.26 | $ 15.70 | $ 10.42 | $ 17.45 |
| Price/Book Ratio | $ 1.65 | $ 10.37 | $ 3.44 | $ 3.84 | $ 4.38 | $ 2.98 | $ 4.74 |
| Price/Sales Ratio | $ 0.37 | $ 1.53 | $ 0.58 | $ 0.61 | $ 0.87 | $ 2.07 | $ 0.79 |
| Price/Cash Flow Ratio | $ 4.55 | $ 13.29 | $ 5.14 | $ 10.40 | $ 8.92 | $ 13.29 | $ 8.46 |
Relative Value Dick’s Sporting Goods, Inc. (DKS)
RECOMMENDATION
As per the analysis conducted, it can be said that the recommendation for the stock of Dick Sporting Goods would be to “Hold” the stock as even with all the competition from new and online retailers, the company has a worth which would pay off in coming years. The company seems to be undervalued as per the Relative Price Comparison analysis, Ratio analysis, and Discounted Cash Flow analysis. The 12-Month Price target of the company is found to be at $ 35.17 with a high estimate of $43 and a low estimate of $ 28 (Morningstar.com).
Tipranks.com. “Top Analyst Price Target.” Adjusted Orice Target on DKS (Digital Image) Tipranks. Tipranks, 17 May 2018. Web. 16 May 2018
Work Cited
CMLViz.” Stock Volatility Risk Alert: Dick’s Sporting Goods Inc Price Volatility Hits an Unsually High Level.” CMLVIZ. CMLVIZ, 5 January 2018. Web. 16 May 2018. http://news.cmlviz.com/2018/01/05/stock-volatility-risk-alert-dicks-sporting-goods-inc-price-volatility-hits-an-unsually-high-level.html.
DICK’S Sporting Goods Inc. “About Us”. DICK’S Sporting Goods Inc. DICK’S Sporting Goods Inc, 2018. Web. 16 May 2018. https://www.dickssportinggoods.com/s/about-us.
Finance Yahoo. “S&P 500 index. “Yahoo. Yahoo, 16 May 2018. Web. 16 May 2018. https://finance.yahoo.com/quote/%5EGSPC?p=^GSPC.
Finance.yahoo.com. “DKS.” Yahoo. Yahoo, 16 May 2018. Web. 16 May 2018. https://finance.yahoo.com/quote/DKS/.
Market Realist. : Analyzing Dick’s Sporting Goods’ Dividend and Share Repurchase Plan.” Market Realist. Market Realist, 9 January 2018. Web. 17 May 2018. https://marketrealist.com/2018/04/could-dicks-sporting-goods-margins-be-pressured-in-2018.
Morningstar. “Dick’s Sporting Goods DKS.” Morningstar. Morningstar, 16 May 2018. Web. 16 May 2018. http://www.morningstar.com/stocks/XNYS/DKS/quote.html.
Morningstar.com. “Annual Report DKS.” Morningstar. Morningstar, 2018. Web. 17 May 2018. http://www.morningstar.com/stocks/XNYS/DKS/quote.html.
Simply Wall Street Pyt Ltd. “Dick’s Sporting Goods.” Simply Wall Street. Simply Wall Street, 17 May 2018. Web. 17 May 2018. https://simplywall.st/stocks/us/retail/nyse-dks/dicks-sporting-goods#close.
Tipranks.com. “Top Analyst Price Target.” Tipranks. Tipranks, 17 May 2018. Web. 16 May 2018. https://www.tipranks.com/stocks/dks/price-target.
Yahoo Finance. “13 Week Treasury Bill Rate.” Yahoo. Yahoo, 2018. Web. 16 May 2018. https://finance.yahoo.com/quote/%5EIRX?p=^IRX.
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