This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature a lower price target for Dicks Sporting Goods Inc (NYSE:DKS), a higher one for GameStop Corp. (NYSE:GME), and for Applied Materials, Inc. (NASDAQ:AMAT) — an honest to goodness upgrade. Let’s tackle those in order, beginning with…
An unsporting downgrade for Dick’s
Sporting-goods superstore Dicks Sporting Goods Inc (NYSE:DKS) is slated to release third-quarter earnings Tuesday morning, but one analyst, at least, isn’t waiting around to get slapped upside the head with bad news. This morning, Canaccord Genuity announced that while it’s still technically in favor of “buying” Dicks Sporting Goods Inc (NYSE:DKS) stock, it’s going to hedge its bets going forward, and cut its price target to $58.
Given the raft of retailers reporting disappointing news lately, that’s probably prudent. But given Dicks Sporting Goods Inc (NYSE:DKS) financials in particular, you have to wonder why Canaccord didn’t go the extra step and officially downgrade its recommendation on the shares.
After all, while it’s certainly possible that Dick’s will surprise to the upside next week, its shares are looking especially vulnerable in the event an earnings disappointment should occur. Trading at 21 times earnings today, the shares cost more than their projected 15% growth rate would appear to warrant. Worse, the quality of Dicks Sporting Goods Inc (NYSE:DKS) earnings is also suspect. Trailing free cash flow at the retailer, which amounts to just $169 million, is barely half the $298 million the company has reported as GAAP “profits” for the past 12 months. As a result, Dick’s shares now carry a price-to-free cash flow ratio in excess of 37 times.
At this high of a valuation, one stumble and Dick’s shares could tumble.
Booting up for GameStop
A second specialty retailer poised to report next week – GameStop Corp. (NYSE:GME) — is getting an opposite reaction on Wall Street today, as analysts at Telsey Advisory Group up their price target on the stock to $58. That’s 26% more than Telsey used to think the stock was worth, but why?
Unlike Dicks Sporting Goods Inc (NYSE:DKS), GameStop Corp. (NYSE:GME) lacks a trailing P/E ratio to hang a valuation on, because… well, to be blunt, because GameStop Corp. (NYSE:GME) hasn’t been profitable in more than a year. But while the stock may lack GAAP profits, what GameStop does have is free cash flow. And it’s got that in abundance.
Over the past 12 months, GameStop Corp. (NYSE:GME) generated some $322 million in real cash profit from its business, belying the negative GAAP “earnings” number. That’s a big pile of cash pouring through the door. Problem is, the stock’s valuation is also quite high. GameStop shares flew up 165% over the past year, with the result being that the stock now sells for about 17.5 times free cash flow.