Will DKS break out, or break down?

June 20, 2018

Will DKS break out, or break down?

At the end of May, Dick’s Sporting Goods (DKS) released its latest quarterly earnings report, and the numbers soundly beat Wall Street’s expectations. That spurred the stock, which had been mostly range-bound since the beginning of the year, to break out in a big way, with an overnight move of more than 26% to around $38 per share. This month the stock appears to be settling back into another narrow range, between roughly $36 and $38 per share. No matter what investing strategy you prefer to use – value investing, swing or trend trading, etc. – the stock certainly seems to be sitting at a turning point.

DKS is an interesting stock to pay attention to, because it exists in a unique segment of the Specialty Retail industry. The number of publicly traded sporting goods retailers seems to be shrinking more and more all the time, as businesses either fold entirely and auction off their assets (think Sports Authority a couple of years ago), get absorbed into other businesses, or are taken private as part of a restructuring plan (think Finish Line). As with a lot of other segments of Specialty Retail, the market has long speculated that the end of the “big-box” sporting goods retailer was imminent, as major brands like Nike Inc. (NKE) have forged new, lucrative agreements with Amazon Inc. (AMZN) to sell their products through their online platform. As a result, the stocks of most of the remaining players, like DKS, Big 5 Sporting Goods (BGFV), and Hibbett Sports, Inc. (HIBB) have been under significant price pressure since the beginning of 2017.

Sometimes, that creates a good long-term opportunity, especially if the underlying business fundamentals are strong. Other times, however, such an extended downturn can signal a major shift in the economy – the kind of “sea change” that can reshape an entire industry. If that is the case, it often means that stocks in that industry could remain low, or go even lower, for an even more extended period of time. Which way will DKS go from here? There are interesting arguments to make for both the bullish and the bearish side. Let’s dive in.

Fundamental and Value Profile

Dick’s Sporting Goods, Inc. is an omni-channel sporting goods retailer offering an assortment of sports equipment, apparel, footwear and accessories in its specialty retail stores primarily in the eastern United States. The Company also owns and operates Golf Galaxy, Field & Stream and other specialty concept stores, and Dick’s Team Sports HQ, an all-in-one youth sports digital platform offering free league management services, mobile applications for scheduling, communications and live scorekeeping, custom uniforms and FanWear and access to donations and sponsorships. The Company offers its products through a content-rich e-commerce platform that is integrated with its store network and provides customers with the convenience and expertise of a 24-hour storefront. It offers products to its customers through its retail stores and online. The Company offers hardlines, which include items, such as sporting goods equipment, fitness equipment, golf equipment, and hunting and fishing gear. DKS has a current market cap of $3.7 billion.

  • Earnings and Sales Growth: Over the last twelve months, sales and earnings both increased modestly. EPS growth was a little over 9% while sales growth was about 4.5%.
  • Free Cash Flow: DKS has generally healthy free cash flow of a little almost $281 million over the last twelve months. This number has increased in each of the last two quarters by a little over 40%, which is generally a sign of improving overall profitability.
  • Debt to Equity: the company’s debt to equity ratio is .18, a low number that is manageable. The company’s balance sheet indicates their operating profits are more than sufficient to service their conservative debt levels, with healthy cash and liquid assets available as well.
  • Dividend: DKS pays an annual dividend of $.90 per share, which translates to an annual yield of 2.47% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for DKS is $18.52 per share. At the stock’s current price, that translates to a Price/Book Ratio of 1.96. This is significantly lower than the industry average, which is above 12, and more than 50% below the stock’s historical average of 3.2. A move to par with the historical average would put the stock’s price just above $59 per share – more than 62% above its current price, and at levels the stock hasn’t seen since early 2017.

Technical Profile

Here’s a look at the stock’s latest technical chart.

  • Current Price Action/Trends and Pivots: The dotted blue line traces the stock’s intermediate upward trend, which had been moving modestly higher from November 2017 to March of this year before dropping back a bit. The overnight jump from $30 to the $38 range at the end of May brought that trend back into focus, with the stock now hovering in that line’s general range. I’ve also drawn horizontal support (green) and resistance (red) lines to illustrate the stock’s current trading range. The stock is at the low end of that range. Given the strength of the intermediate trend, there is a reasonable argument to make that the stock should bounce higher and rally to the upper end of that range again. The risk, however is the gap from the stock’s current price down to the $30 range. It is very common, at least in the short term, for stocks to fill in the gaps that sometimes happen on an overnight basis. Even if the stock doesn’t break down and start to fill that gap, the stock’s clear inability to drive higher following its overnight jump, but to instead find resistance around $38 signal fairly limited short term upside. The stock would have to break above that level to confirm the intermediate upward trend and extended it into a longer period of time.
  • Near-term Keys: This is certainly a stock that bears watching. A break below $35 would mark a breakdown below the stock’s current support and would likely see little to keep the stock from dropping back down to $30 or even lower. On the other hand, a push above $38 should provide the stock with strong bullish momentum that could see the stock push in the high $40’s or even the low $50 range in relatively short order.