Dicks Sporting Goods Inc (NYSE:DKS) surprised Wall Street with much higher earnings numbers. Amid an e-commerce onslaught and a decision to stop selling some classes of guns, expectations remained low.
Now that investors know the company will thrive despite this decision on guns, Dick’s is poised for a bright future. Also, given valuations and dividend yields, new investors can still profit from the recovery of DKS stock.
Dick’s Impressed on Earnings, DKS Stock Spiked
The sporting goods company blew away estimates for Q1. The earnings per share (EPS) came in at 59 cents. This beat Wall Street estimates by 14 cents per share. The company saw EPS of 52 cents in the same quarter last year.
Revenue of $1.91 billion exceeded the Wall Street estimate by $30 million. Revenue also showed a 4.4% move higher from last year’s levels, with online sales increasing 24% over the same time period.
However, the biggest surprise arguably came from management’s revised 2018 guidance. Dicks Sporting Goods now expects to earn $2.92-$3.12 per share in 2018. Earnings guidance had previously stood between $2.80-$3.00 per share. The market’s euphoric reaction took the DKS stock price higher by nearly 26% following the announcement.
Undoubtedly, the decision to end the sale of assault-style rifles pulled expectations down. However, those concerns disappeared with the higher earnings numbers. Investors also have more assurances that the rise of e-commerce poses much less of a threat than many feared.
In fact, the e-commerce sales increase shows DKS can thrive both in physical stores and online against e-commerce giants such as Amazon.com, Inc. (NASDAQ:AMZN).
It’s Not Too Late
Not all were lucky, however. Former competitors such as Sports Authority Inc. and Golfsmith International Holdings Inc. fell victim to the changing retail landscape. However, the “Amazon will take over” narrative has started fading. The market now believes that DKS stock, along with companies such as Foot Locker, Inc. (NYSE:FL), Big 5 Sporting Goods Corporation (NASDAQ:BGFV), and privately-held BPS Direct, LLC (owner of Bass Pro Shops), will likely survive. Some may also begin to thrive again.
Furthermore, investors who want to benefit from the recovery of DKS stock still have time. Despite the massive stock price increase after earnings, valuations remain modest. The consensus EPS for this year’s earnings stands at $3.02. Assuming that figure holds, the stock trades at a forward price-to-earnings (PE) ratio of just over 12.
Our own Luke Lango estimates the present value of DKS stock stands at $44 per share, assuming an average forward multiple of 16 for the S&P 500. He also believes earnings will reach $4 per share in five years, taking the stock price to $64 per share at that time. Others estimate the average forward PE for the retail industry stands above 19. Either way, both of us agree that DKS stock should head steadily higher.
Investors also should not count out the DKS stock dividend. The current annual dividend stands at 90 cents per share. This places the yield at around 2.4%, well above current S&P 500 averages. Dick’s has also increased the dividend every year since 2015. While it is too early to tell if the company seeks to increase dividends annually, the trend bodes well for income-oriented investors.
Bottom Line on DKS Stock
Investors still have time to profit from the recovery of DKS stock. The latest earnings reports show Dick’s can still deliver profit growth and thrive in the e-commerce space. Moreover, despite the massive increase in the stock price following earnings, DKS stock still trades at a low valuation.
Furthermore, its dividend pays an above-average yield. Its recent history also indicates that long-term investors could enjoy dividend increases every year.
No, Amazon is not going to take over retail, particularly not in the sporting goods space. Now that Wall Street understands this, DKS stock will recover, and new investors still have an opportunity to benefit.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
