Leadership Position For Dick's Sporting Goods Will Continue To Improve Post-TSA Bankruptcy

Wedbush Securities has started coverage of Dicks Sporting Goods Inc DKS with an Outperform rating and $65 target price on competitive strength and solid leadership position.

Dick’s Sporting Goods is the largest beneficiary of the bankruptcy of The Sports Authority (TSA), and the absence of a major competitor is likely to help the company gain leverage with its vendors.

“It is no secret that while DKS will likely be the largest beneficiary to TSA’s demise, we believe the Street is still broadly underestimating the potential benefit over the next 18–24 months,” analyst Christopher Svezia wrote in a note.

Svezia estimates $1 billion sales opportunity for the company and anticipates 20–25 percent flow-through from these sales on a weighted basis that could generate $1.25 in EPS.

Estimates Could Be Conservative

In fact, Svezia believes his estimates as conservative as the last time the company had material comp outperformance (FY10), the flow through was about 36 percent.

Further, the analyst pointed out that Dick’s bargaining power has increased and its partnership with the major brands has been strengthened, while the company would get more profits from e-commerce, which contributes nearly $1 billion in revenues.

“While we recognize the negative arguments around branded DTC, Amazon and the box size, and if nothing else TSA’s demise, has solidified DKS’s ability to take share and remain very competitive in the medium term,” Svezia highlighted.

Although investors argue that the stock has gained about 60 percent this year, the analyst said it was down 42 percent from FY15 highs at the beginning of 2016. This makes 60 percent year-to-date jump a “bit exaggerated.”

Shares of Dick's are trading at 14x Wedbush’s FY17 EPS estimate of $3.84, or at about an 11 percent discount to its historical five-year average. The $65 target represents 17x P/E and implies potential return of 19 percent over Tuesday’s close of $54.67.

At last check early in Wednesday's regular trading session, Dick's was up 2.43 percent at $56.