DICK'S Sporting Goods (NYSE:DKS) Looks Undervalued Enough to Catch Our Interest

Stjepan Kalinic
March 08, 2022
Source: Shutterstock

DICK'S Sporting Goods, Inc. (NYSE: DKS) gains were nothing short of spectacular in 2021, as the company posted solid results across the board and went above & beyond with its special dividend payout.

Although 2022 started on a weaker note, with suppliers like Nike threatening to focus on digital sales, the latest earnings results sound reassuring.

See our latest analysis for DICK'S Sporting Goods

Q4 Earnings Results

  • Non-GAAP EPS: US$3.64 (beat by US$0.11)
  • Revenue: US$3.35 (beat by US$40m)
  • Revenue growth: +7% Y/Y
  • 2022 guidance EPS: US$11.7-13.10 vs. consensus US$11.26
  • Same-store sales: -4% to 0%

Meanwhile, the company ended 2021 with US$2.6b in cash and no outstanding borrowings. Looking at our data, we have to take notice of the healthy balance sheet and relatively modest use of debt, which has been stable in the last 5 years.

Estimating the Intrinsic Value

We will use a Discounted Cash Flow (DCF) valuation for this outlook. For keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest.

We're using the 2-stage growth model, which means we take 2 stages of the company's growth. In the initial period, the company may have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next 10 years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value.

We assume companies with shrinking free cash flow will slow their rate of shrinkage and that companies with growing free cash flow will see their growth rate slow over this period. Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF ($, Millions) US$1.32b US$1.05b US$1.01b US$997.0m US$817.5m US$609.0m US$543.5m US$505.7m US$484.1m US$472.3m
Growth Rate Estimate Source Analyst x7 Analyst x7 Analyst x5 Analyst x2 Analyst x2 Analyst x1 Est @ -10.75% Est @ -6.95% Est @ -4.29% Est @ -2.43%
Present Value ($, Millions) Discounted @ 7.3% US$1.2k US$912 US$819 US$751 US$574 US$398 US$331 US$287 US$256 US$233

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$5.8b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten-year period. For some reasons, a very conservative growth rate is used that cannot exceed that of a country's GDP growth.

In this case, we have used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. In the same way, as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.3%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US$472m× (1 + 1.9%) ÷ (7.3%– 1.9%) = US$8.9b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$8.9b÷ ( 1 + 7.3%)10= US$4.4b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$10b. To get the intrinsic value per share, we divide this by the total number of shares outstanding.

Compared to the current share price of US$99.5, the company appears about fair value at a 15% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate.

NYSE: DKS Discounted Cash Flow March 8th, 2022

The assumptions

The most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. The DCF also does not consider the possible cyclicality of an industry or a company's future capital requirements, so it does not give a full picture of a company's potential performance.

Given that we are looking at DICK'S Sporting Goods as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. We've used 7.3 in this calculation%, based on a levered beta of 1.277. Beta is a measure of a stock's volatility, compared to the market as a whole.

Looking Ahead:

Even after the big run in 2021, our analysis shows that the stock might be potentially undervalued at the moment. While our estimates are not foolproof (there is no such thing in valuation analysis), another interesting fact that we caught is insider buying bias in the last several months.

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. For DICK'S Sporting Goods, there are three crucial factors you should assess:

  1. Risks: You should be aware of the 3 warning signs for DICK'S Sporting Goods (1 is a bit concerning!) we've uncovered before considering an investment in the company.
  2. Management: Have insiders been ramping up their shares to take advantage of the market's sentiment for DKS' future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other High-Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, search here.

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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