Stock Analysis

Optimistic Investors Push DICK'S Sporting Goods, Inc. (NYSE:DKS) Shares Up 26% But Growth Is Lacking

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Despite an already strong run, DICK'S Sporting Goods, Inc. (NYSE:DKS) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 48%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about DICK'S Sporting Goods' P/E ratio of 16.6x, since the median price-to-earnings (or "P/E") ratio in the United States is also close to 16x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, DICK'S Sporting Goods has been very sluggish. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

View our latest analysis for DICK'S Sporting Goods

NYSE:DKS Price to Earnings Ratio vs Industry March 19th 2024
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Is There Some Growth For DICK'S Sporting Goods?

In order to justify its P/E ratio, DICK'S Sporting Goods would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 103% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.7% per year over the next three years. With the market predicted to deliver 10% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that DICK'S Sporting Goods' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Its shares have lifted substantially and now DICK'S Sporting Goods' P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that DICK'S Sporting Goods currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for DICK'S Sporting Goods with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on DICK'S Sporting Goods, explore our interactive list of high quality stocks to get an idea of what else is out there.

Valuation is complex, but we're helping make it simple.

Find out whether DICK'S Sporting Goods is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St 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. Simply Wall St has no position in any stocks mentioned.