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Is Dicks Sporting Goods Inc (DKS) Destined for Greatness?

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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Dicks Sporting Goods Inc (NYSE:DKS) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

Dicks Sporting Goods Inc (NYSE:DKS)

What we’re looking for
The graphs you’re about to see tell Dicks Sporting Goods Inc (NYSE:DKS) story, and we’ll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Dicks Sporting Goods Inc (NYSE:DKS) key statistics:

DKS Total Return Price Chart

DKS Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 30.8% Pass
Improving profit margin 50.7% Pass
Free cash flow growth > Net income growth (23.5%) vs. 97.1% Fail
Improving EPS 85.6% Pass
Stock growth (+ 15%) < EPS growth 82.3% vs. 85.6% Pass

Source: YCharts.
*Period begins at end of Q2 2010.

DKS Return on Equity Chart

DKS Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 9% Pass
Declining debt to equity No Debt Pass
Dividend growth > 25% (75%) Fail
Free cash flow payout ratio < 50% 183.30% Fail

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we’re going
Dicks Sporting Goods Inc (NYSE:DKS) puts together a solid performance by grabbing six out of nine possible passing grades. The company’s big weakness of late is falling free cash flow, which has diverged markedly from its net income over the past three years, and which seems inadequate for its current dividend payouts. Despite this issue, Dicks Sporting Goods Inc (NYSE:DKS)shareholders enjoyed solid growth over the past three years, and the stock has hit new peaks since emerging from the crash of 2008. But does that mean Dicks Sporting Goods Inc (NYSE:DKS) will keep outperforming in the future? Let’s dig a little deeper.

Dick’s is the largest full-line sporting goods retailer in the United States. Its national footprint boasts over 520 general sporting goods stores and 81 Golf Galaxy stores. After a strategic reevaluation that saw management decide to refocus on smaller, Dick’s now envisions a market opportunity of up to 1,100 stores. Unfortunately, Dick’s available cash hoard is much smaller than it was even a year ago, which means that debt-raising may be on the table to support these ambitions.

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