Buy the Analysts Bias Towards Dick’s Sporting Goods Stock

Investors tend to follow the “What have you done for me lately?” mantra obsessively. Sometimes that serves them well and sometimes it gets them into a lot of trouble. In the case of Dick’s Sporting Goods NYSE: DKS, the company reported its first-quarter earnings on June 2, 2020.

The overall results were typical of the retail sector. The company posted a larger loss in earnings than was expected. But Dick’s did show a slight beat in revenue. This was a testament to the company’s strong increase in e-commerce sales. This included a curbside delivery option that was previously unavailable.

The company also reported a strong balance sheet with approximately $1.5 billion available in cash and cash equivalents. The company also reported a slight decrease in inventory. That is astonishing and it means that the company may not be as reliant on promotions to liquidate inventory for the rest of 2020.

However, that good news doesn’t seem to be priced into DKS stock. The company’s stock has been choppy since the earnings report, while still pushing to a gain of nearly 10%. But that may be changing. A recent analyst opinion is showing that investors may be starting to take a closer look at Dick’s stock. Here are a couple of reasons why you may want to do the same.

Recent Analysts Reports Have Pointed to a Higher Stock Price

Analyst ratings are always a good measure of how investors feel about a stock. But you have to pay attention to the most recent news. Dick’s Sporting Goods has been rated by 24 analysts in the last 12 months.

At first glance, a consensus 12-month price target of $41.96 doesn’t create much room for excitement. But the most recent analyst ratings have been far more bullish. In the last week, four analysts have delivered an average target of $49. And on June 24, John Kernan from the analyst firm Cowen gave the stock an upgrade from Market Perform to Outperform with a price target of $50.

In fact, since the earnings report, only one analyst firm has lowered its price target. And even that analyst still gives DRK stock a price rating significantly higher ($44) than the current consensus estimate.

How Dick’s Sporting Goods is Benefiting From the Pandemic

What has analysts excited? Company management reported that eCommerce sales increased over 200% since the company closed all their stores. And while it’s true that necessity can be the mother of invention. This was an innovation that had to happen.

Look at Home Depot NYSE: HD. The reason why Home Depot is competing with Amazon NASDAQ: AMZN is that the company figured out the special sauce of omnichannel. Consumers want what they want when they want it, and they want it delivered where they want it or available through curbside pickup.

Consumers were already moving towards a model that does not require spending any more time at or in a store than they need to. And Home Depot has realized that they can deliver in a niche that is cost-prohibitive for Amazon to compete in.

The story is not identical for Dick’s, but it’s similar. There are some pieces of sporting equipment (baseball bats, golf clubs, etc.) that consumers don’t want to buy online. They need to try it out. And that’s been where Dick’s has excelled as a brick-and-mortar chain.

But there are other items that consumers just need to buy at the best price they can. In this case, an ecommerce model that can allow these consumers to pick up items the same day, and if desired with contactless delivery, can be a way for Dick’s to stand apart.

The point is that the disruption caused by the pandemic simply moved Dick’s into a direction it was already going to have to move into. And the company is doing so successfully.

Are There Risks to Investing in Dick’s Sporting Goods?

The biggest risk for investors looking at Dick’s Sporting Goods stock is the possibility that team sports will not return in the fall. This was a point confirmed by Ed Stack, Chairman and CEO, who said, “Team sports is the one that we're most concerned about from a go-forward sales standpoint, it depends. We don't know if the kids are going to play football this fall or if they're going to play -- if they're going to play soccer this fall.”

It’s fair to say that the company probably traded a loss in youth baseball and softball purchases for home fitness equipment and apparel.

Unfortunately, that’s probably a one-time trade. If the company has to weather a fall without football, soccer, and volleyball equipment purchases, it’s hard to see how that doesn’t have an effect on the bottom line.