Should You Invest in a Sporting Goods Company?
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Analysts have been bullish on sporting goods stores of late. On July 4, analysts at Deutsche Bank reiterated a "buy" rating on Dick's Sporting Goods (NYSE: DKS). The average price target among analysts for that stock is $58, or 13.4% more than where shares currently stand.
In the past three months, the seven analysts covering Big 5 Sporting Goods (NASDAQ: BGFV) have raised their EPS estimates by 23%, both for this year and 2014.
Cabela's (NYSE: CAB) is another company that sells sporting goods equipment. Unlike Dick's and Big 5, Cabela's does not sell equipment for just about every sport you can think of. Instead, the company focuses on providing hunting, fishing, and other outdoor equipment.
Massive gains have been realized by Big 5 bulls
In the past twelve months, shares of Big 5 have more than tripled, bringing big gains to those who bought the stock one year ago. But, the median analyst estimate for the stock is 13.8% below the current market price.
What's more, the company's largest shareholder, a Connecticut-based hedge fund named Stadium Capital, has been selling shares by the boatload. Between the end of March and the beginning of June, the fund had dumped over 700,000 shares, or 22.5% of its stake in Big 5.
Big 5 has a solid balance sheet, but I think the stock may have run up a little bit too much. Its current market value is $524.1 million. Its five year net income average for 2008-2012 was $16.57 million, well below the $26.5 million figure for the years 2002-2006.
However, a much larger competitor may be a better buy
With a market cap of $6.4 billion, Dick's is a much larger chain of sporting goods stores than Big 5. Dick's also has a much larger institutional following, with nearly 30 analysts covering the stock and over 90% of outstanding shares being owned by institutional and mutual fund owners.
Dick's has a strong balance sheet, with a healthy amount of working capital and an insignificant amount of long-term debt. Turning to the income statement, Dick's has registered impressive net income growth. Over the past three years, the company has grown net income at a 42.4% CAGR. Total net income for the company in 2013 was $290.71 million.
A potentially big new revenue stream for Dick's comes in the form of a new niche store the company is planning on opening. Under the name Field and Stream, these new stores will cater specifically to hunters, fishers, and other outdoorsmen. Dick's is attempting to enter an arena where Cabela's is king, it will be interesting to see how that plays out.
Cabela's has the most room to run
Cabela's is a company that the market currently values at $4.8 billion. Is this company's stock, which has already risen over tenfold since 2009, still worth buying?
Well, the company's balance sheet gets a mixed review. On one hand, working capital is a very healthy $3.42 billion. On the other hand, the company keeps piling on long-term debt. The company's long-term debt load has nearly doubled since the end of 2011. I understand that it is aggressively expanding, but it could be too much too fast.
In the past couple of years, the company has done a splendid job of growing net income and sales. Net income and sales have grown at three-year compounded annual growth rates of 14.2% and 5.7%, respectively.
When the company reported first-quarter results this year, it blew away expectations. Same store sales were up 24% and net income increased 72.9% year over year. It's unwise to read too much into the results of any one quarter, but it's a sign Cabela's isn't showing any signs of slowing down.
Big 5 has seen its shares experience a massive run up in the past year. Analysts have a median price target below where the stock currently trades and its biggest shareholder has been selling.
Dick's seems like a solid option for investors seeking a stable, profitable company that will likely deliver decent returns.
Investors who enjoy owning companies that operate within a niche will find one such company in Cabela's. The company's growth in the past four years has been absolutely incredible. However, Cabela's also presents sizable risk. The company has massive amounts of debt and must continue growing at eye-popping rates to justify the current valuation.
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