Dick’s Sporting Goods (DKS) has, so far this year, been a fantastic stock to own. It was up nearly 33% YTD at yesterday’s close versus a roughly 11% gain for the S&P 500, and that number will likely increase today given that early premarket trading is indicating that it will open around 7% higher as I write this. That most recent surge has been prompted by a great earnings report that also contained a very rosy outlook.
That is all great news, but it makes more sense for investors to sell DKS on the pop this morning than buy, and to use any proceeds to invest in their rival, Academy Sports and Outdoors (ASO).
How did I come to this conclusion? After all, it is not that there were holes in Dick’s earnings. They beat on both the top and bottom lines, showed relatively good growth in the process, and upped their full year guidance based on consumers showing a willingness to spend, particularly on shoes and clothing. However, that trend, should it play out as expected, will also benefit Academy, a company that has more room for growth, and whose stock is nonetheless cheaper than DKS.
As you can see from the charts above, DKS has massively outperformed ASO so far this year, but in some ways, that is part of the problem moving forward.
Dick’s can grow, of course, but their path to sustained, long-term growth is an uphill one. To some extent, that is because they are a victim of their own success. They are a massive company, with sales of around $13 billion a year and a presence across America. Everybody has heard of Dick’s, so marketing is aimed at squeezing a little more out of existing clients rather than attracting new customers. Operationally, there is a push to increase margins by growing their online sales rather than expanding to new locations. There is nothing wrong with that as a strategy. It is still working for a company like Walmart (WMT), for example, but the situation at Dick’s is different.
They have done an outstanding job of stimulating growth over the last five years and have taken advantage of the shift to “experience” purchases among American consumers that has followed the pandemic, while also benefitting from the opportunities that that time presented as people turned more to outdoor sports and pursuits rather than staying inside. Those consumer behaviors and preferences may fade with time, but even if they are here to stay, their impact on growth has already played out. Future growth is therefore more likely to come from adding customers and penetrating new markets, and Academy just has more room for that than Dick’s.
And yet conventional stock valuation metrics imply that the next few years will see Dick’s continuing to grow much faster than Academy. DKS has trailing and forward P/Es of around 16 and 15, for example, versus 8 and 8.3 for ASO. That disparity is even more marked when you factor in projected growth for each company, with DKS having a PEG ratio, where a low number represents more value and a number under 1.0 suggests a stock is actually undervalued, of 3.6 as opposed to the 0.6 of ASO.
Dick’s is a great company that is easy to get behind, but stock evaluation is about more than whether or not you like the company, and their stock is just too expensive at current levels. While I have no reason to distrust Dick’s management on their take on the consumer, Academy Sports and Outdoors may just be better placed to take advantage of that than Dick’s themselves. Add to that the fact that however you look at it, Dick’s is priced for perfection while Academy is underpriced, and I would rather be holding ASO for the next year or two than DKS. This morning’s big jump in the latter is an opportunity to sell at a premium.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
