Marcial: Dick's Sporting Goods, a Bargain Play

The nation's retailers are among those companies hit hard by the recession, with Circuit City (CCTYQ) filing for bankruptcy Nov. 10, the most recent to fall. In the past year 14 other major retailers have sought the same Chapter 11 protection. Indeed, not many in the industry have dodged the bullet. But in such dire times, opportunities of value always emerge.

One bargain play is Dick's Sporting Goods (DKS), which analysts say hasn't been immune from the tough economy but is better positioned than most. That's probably why Wall Street continues to favor the stock, despite a gloomy outlook for the industry. Of the 26 analysts tracked by Bloomberg, none recommend selling the stock. Fifteen rate it a buy and 11 recommend holding the shares. A leading outlet for a broad assortment of athletic apparel, goods, and equipment, Dick's Sporting has about 340 stores in 36 states, primarily in the eastern U.S.

Although like other retailers the company is feeling the strains of strapped consumers, Dick's Sporting's "strong balance sheet and balanced portfolio of products" have enabled it to continue taking market share "that should lead to a stronger company over time," says Michael Baker of Deutsche Bank (DB), who rates the stock a buy. (Deutsche Bank does not do investment banking for Dick's Sporting.)

Good Inventory Control

One reason: Dick's Sporting is controlling inventory well, giving it some flexibility before the holidays and allowing it to limit markdowns and stabilize margins, says Baker.

Certainly the company's stock has been battered. From a 52-week high of 33.86 on Feb. 7, 2008, it tumbled to a 52-week low of 11.80 on Veteran's Day (Nov. 11). Even so, Baker expects the shares to hit 23 in a year based on 16 times his fiscal 2010 (ending Jan. 31) earnings estimate of $1.43 a share. For fiscal 2009, he has lowered his forecast to $1.27 from $1.29 to account for the recession's impact. The company earned $1.34 in fiscal 2008.

Another bull on the stock is Roger Vogel, managing director at Silvercrest Asset Management Group, which owns shares. Vogel says the long-term story on Dick's Sporting revolves around its management. "Dick's Sporting is one of the best retailers in the country, run by one of the best management teams in the industry," he says.

Unlike other retailers, the company has plenty of markets to conquer, Vogel says. It is underexposed in other parts of the country such as Texas, he notes. He believes the stock will climb to much higher levels in the next 12 months.

"Compelling Value"

Some analysts also like the stock's valuation. "Dick's Sporting remains one of our best growth names and one of the best longer-term franchises in retail, and we believe the shares offer a compelling value at current levels," says Gary Balter of Credit Suisse (CS), who rates the stock outperform with a 12-month target of 23. No doubt, it's likely things will get tougher, he says, as indicated by the reduction in earnings and sales estimates. But he sees Dick's Sporting's stores still performing relatively well. (Credit Suisse says it may seek to do business with Dick's Sporting.)

So what separates Dick's Sporting from other retailers? Its brand focus, product management, and acquisition opportunities, among other things, analysts say. "We believe Dick's Sporting has a differentiated strategy in a crowded arena, and we think the company has organic and acquisition-related growth opportunities," says Pearl Wang, an analyst at Standard & Poor's Equity Research. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP).) It has merchandised and managed its products very well, she adds. "We favor the company's brand focus, whether their products are brand names or private label," says Wang.

She expects earnings to grow at a double-digit rate in the low teens over the next few years, driven by sales expansion and further operating efficiency initiatives, in addition to greater market penetration.

Undoubtedly the stock will continue to reflect the market's tremors and volatility. But at its current beaten-down price, Dick's Sporting should count as one of the real bargains around.