* All data are as of the close of Wednesday, December 17, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
The holiday gift-giving season is one of the best seasons of the year for sporting goods stores, as spouses and family members surprise the sports enthusiasts in their families with new fitness apparel, camping gear, and golf clubs in anticipation of new adventures just a few months away.
In fact, the Sporting Goods Stores industry's estimated earnings growth for this and next quarters is expected to be greater than its annualized growth rate.
As part of the Consumer Discretionary sector, the industry has been running, jumping and climbing its way up the charts with adrenaline throughout this almost six-year long bull run, as graphed below.
Since the economic recovery began in early 2009, where the broader market S&P 500 index [black] has gained 200% and the SPDR Consumer Discretionary Sector ETF (NYSE: XLY) [blue] has risen 330%, the three largest Sporting Goods Stores companies (all U.S.-based) have all beaten the broader market, with two beating even their sector, as Hibbett Sports, Inc. (NASDAQ: HIBB) [orange] shoots 250%, Dick's Sporting Goods Inc. (NYSE: DKS) [beige] scores 350%, and Cabela's Incorporated (NYSE: CAB) [purple] celebrates 555%.
On an annualized basis, where the S&P has averaged 34.78% and the XLY has averaged 57.39%, Hibbett has averaged 43.48%, Dick's has averaged 60.87%, and Cabela's has averaged 96.52% per year!
Looking forward, the Sporting Goods Stores industry's earnings are expected to vastly outperform the broader market's average earnings growth rates as tabled below, where green indicates outperformance while yellow denotes underperformance.
Over the immediate term, the industry's earnings are seen growing at 2.13 to 2.89 times the broader market's average rate, before slowing to a more sustainable but still active 2.1 times in 2015, and 1.63 times annually over the next five years. As the economy is anticipated to improve, consumers are expected to splurge a little more on recreation.
Zooming-in a little closer, the three largest companies in the space are expected to follow their industry fairly closely over the longer term, as tabled below.
While over the immediate two quarters, all three companies are seen under-growing their earnings versus the S&P's average at varying rates, come 2015 and beyond, all three are seen outgrowing the S&P's earnings at some 1.18 to 1.59 times its average growth rate, with the exception of a very close market-perform by Hibbett throughout 2015.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Dick's delivered the greatest revenue growth year-over-year, where Cabela's delivered the greatest earnings growth. At the low end of the scale, Cabela's and Hibbett split the last place finishes between them, with both Hibbett and Dick's contending with some earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, Hibbett operated with the widest profit and operating margins, while Dick's contended with the narrowest.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, Hibbett's management team delivered the greatest returns on assets and equity, where Cabela's team delivered the least.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies compared here, Cabela's provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Dick's DEPS over current stock price is the lowest; although all three ran an exceptionally close race.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, Cabela's stock is the cheapest relative to forward earnings, company book value and 5-year PEG, where Hibbett's stock is the most overpriced to all ratios.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, Cabela's offers the highest percentage of earnings over current stock price for the current quarter and 2015, while Hibbett offers it for the next quarter. At the low end of the scale, Cabela's and Hibbett reciprocate the placement in all metrics.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Dick's offers the greatest earnings growth in the current and next quarters as well as in 2015, while Cabela's offers it over the next five years. At the low end of the spectrum, Cabela's is seen growing its earnings the slowest in the current quarter where Hibbett is expected to grow the slowest beyond.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Cabela's stock offers the greatest upside potential and least downside risk, while Dick's stock offers the least upside and Hibbett's offers the greatest downside.
It must be noted, however, that Cabela's stock is already trading below its low target. While this may mean increased potential for a sharp move upward, it may warrant a reassessment of future expectations.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Cabela's is best recommended with 5 strong buys and 4 buys representing a combined 60% of its 15 analysts, followed by Dick's with 8 strong buy and 7 buy ratings representing 50% of its 30 analysts, and lastly by Hibbett with 2 strong buy and 2 buy recommendations representing 21.06% of its 19 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… Cabela's with an Olympic lead, outperforming in 16 metrics and underperforming in 8 for a net score of +8, followed far behind by Dick's, outperforming in 7 metrics and underperforming in 7 for a net score of 0, and lastly by Hibbett panting out-of-breath in the distance, outperforming in 8 metrics and underperforming in 17 for a net score of -9.
Where the Sporting Goods Stores industry is expected to outperform the S&P broader market substantially this and next quarters, significantly in 2015, and meaningfully beyond, the three largest companies in the space are expected to underperform the market's earnings growth near term before going mountain climbing all the way up and overtake the S&P longer term.
Yet after taking all company fundamentals into account, Cabela's Incorporated flexes the fittest financial muscles, given its lowest stock price ratios, highest current ratio, highest EBITDA over market cap, highest diluted earnings over current stock price, highest trailing earnings growth, highest future earnings over current stock price overall, highest future earnings growth longer term, best price targets, and most strong buy and buy analyst recommendations - decisively winning the Sporting Goods Stores industry meet.