The stock of Dick’s Sporting Goods (NYSE:DKS, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $96.925 per share and the market cap of $8.7 billion, Dick’s Sporting Goods stock shows every sign of being significantly overvalued. GF Value for Dick’s Sporting Goods is shown in the chart below.
Because Dick’s Sporting Goods is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 9% over the past three years and is estimated to grow 2.17% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Dick’s Sporting Goods has a cash-to-debt ratio of 0.59, which is in the middle range of the companies in the industry of Retail – Cyclical. GuruFocus ranks the overall financial strength of Dick’s Sporting Goods at 6 out of 10, which indicates that the financial strength of Dick’s Sporting Goods is fair. This is the debt and cash of Dick’s Sporting Goods over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Dick’s Sporting Goods has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $11.2 billion and earnings of $10.58 a share. Its operating margin of 12.57% better than 86% of the companies in the industry of Retail – Cyclical. Overall, GuruFocus ranks Dick’s Sporting Goods’s profitability as strong. This is the revenue and net income of Dick’s Sporting Goods over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Dick’s Sporting Goods is 9%, which ranks better than 78% of the companies in the industry of Retail – Cyclical. The 3-year average EBITDA growth is 18.8%, which ranks better than 71% of the companies in the industry of Retail – Cyclical.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Dick’s Sporting Goods’s return on invested capital is 21.63, and its cost of capital is 9.03. The historical ROIC vs WACC comparison of Dick’s Sporting Goods is shown below:
In summary, the stock of Dick’s Sporting Goods (NYSE:DKS, 30-year Financials) is estimated to be significantly overvalued. The company’s financial condition is fair and its profitability is strong. Its growth ranks better than 71% of the companies in the industry of Retail – Cyclical. To learn more about Dick’s Sporting Goods stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.