Stock of the Week
Dick's Sporting Goods
NYSE Symbol: DKS
Price as of 5/21: $42.85
Sell in May and go away has not worked yet, but the major averages hasn't gone anywhere either. The small cap, Russell 2000 is negative for the month and down 8.8% from the March highs. The Nasdaq is down 5.3% from the March highs while the Dow and S&P 500 remain near all-time highs. The Dow Transports is also hear all-time highs. One cause for concern is the VIX or volatility index. Last week the index hit $12. Today the VIX fell below $12 to a new 52 week low. In the past 5 years, the $12 level for the VIX index has meant a short term top for the major averages. Not a good sign, but we'll see. So far in 2014 utilities are running circles around the rest of the major sectors up 12% year to date. Telecom is in second place up 6%. Both sectors were the worst performing sectors from 2013. The best performing sector from 2013, the consumer discretion is taking its lumps this year, now negative for 2014. Many of the retailers in the sector have been blaming the foul weather from the first quarter for the disappointing results. This week we'll highlight a retailer that reported disappointing earnings for this very reason. The stock of the week is Dicks Sporting Goods. Dicks has done a great job in the last 10 to 20 years gobbling up their competition to become a powerhouse in the athletic sports equipment department. So far 2014 hasn't gone the way Dicks would like it. The stock is down 26% from the January and March highs and dropped 17% on Tuesday following disappointing results. The company reported disappointing sales in the golf and hunting divisions and further lowered guidance for the rest of the year. The stock may remain under pressure for a while, but at recent levels, the stock is pricing in a lot of bad news. One analyst reiterated his buy rating on the stock with down side risk to $39 a share and upside to $60 in the coming years. Good risk reward if Dicks can correct the problems in their weather sensitive sectors.
AS mentioned, Dick's Sporting Goods misses earnings estimates on Tuesday by 2 cents while also missing on revenue as well. The company further lowered guidance for the second quarter and for the full year citing weakness in golf and hunting. The earnings came in at 50 cents a share while sales rose 7.9% year over year to $1.44 billion verse $1.46 billion consensus. On the conference call Chairman & CEO, Edward Stack said the difficulties were isolated to two categories, golf and hunting. He went on to say that after a very challenging first quarter in golf last year, they expected some further headwinds and only modest improvement, but instead they saw a continued significant decline. Dicks issued a similar story for their hunting department. One of the few bright spots for Dicks was their eCommerce business which continues to show exceptional growth. The strength was in in several categories including women's and youth athletic apparel, footwear and team sports. Looking forward, Dicks sees second quarter earnings coming in around 62 cents to 67 cents verse estimates of 82 cents. For the full year, Dicks sees $2.70-2.85 verse $3.08 a share.
The recent pullback in Dicks' stock has brought valuations down significantly. With the recent pullback, Dick's stock now trades for 15 times 2014 earnings and 12 times 2015 earnings. The stock also trades for less than 1 times sales. The dividend is modest at 1% yield, but with a low payout ratio of just 19%, Dicks could easily hike their dividend going forward. In the short term, Dick's stock may remain under pressure, but longer term the valuation is compelling for this blue chip athletic equipment powerhouse.