Shares of Dick's Sporting Goods, Inc. (DKS) are down 23 percent year to date at the market close on June 2, with the most drastic decline following the company's May earnings announcement. The company reported 2.4 percent same-store sales growth, a figure that was bolstered by the closing of rival Sports Authority last year. Reported earnings per share were in line with analyst consensus, but investors were discouraged by management's outlook. The company plans to pull back on store openings and cut jobs, which are worrying signs, considering the recent fragmentation of competition. Almost every retailer is currently threatened by the rise of Amazon.com, Inc. (AMZN), so a gloomy outlook tends to incite significant pessimism among shareholders.

DKS Earnings vs. Estimates

Rapid deterioration of valuation, especially in the absence of radical alterations to a company's fundamentals, can signal opportunity for long-term value investors. The risk remains that the stock was simply overvalued before an adjustment, but these are nonetheless the sorts of events that interest opportunistic investors looking for discounts. Intrinsic valuation in this context has been a method successfully deployed by the likes of Warren Buffet for decades. (See also: Warren Buffet's Investing Style Reviewed.)

Intrinsic valuation models such as the residual earnings, discounted cash flow and dividend discount models are plagued by a number of problems. The "garbage-in-garbage-out" issue is often cited by detractors because uncertainty around model inputs can create huge margins for error in the calculated intrinsic values of stocks. Wide confidence intervals can eliminate the efficacy of these methods. However, these models can be reverse-engineered to determine which growth rates are implied at given market prices. (See also: What Is the Intrinsic Value of a Stock?)

For the sake of this analysis, the model assumes that consensus analyst earnings estimates for the next five years are being accepted as valid by investors in the market. The dividend payout ratio over the long term is assumed to reflect the trailing-10-year average, and the discount rate used in the calculation is 8 percent. This discount rate is not calculated scientifically and would likely vary among investors, but it is a common figure when dealing with generalized stock market returns. (Note: "Implied Growth" tables are based on models by the author, Ryan Downie.)

DKS YTD High Implied Growth

Dick's year-to-date high price was around $55.30 on January 6, at which point the implied long-term dividend growth rate was 5.99 percent. (See also: The Dividend Discount Model.)

DKS Current Implied Growth

Now that shares are trading around $41.10, the implied growth rate has plunged to 5.235 percent. The company has reported 9.79 percent average sales growth and 8.57 percent average operating income growth over the past 10 years, although these figures have been supported by rising store count. (See also: Dick's Sporting Goods Q1 Earnings Meet, Soft Sales Hurt Stock.)

Dick's has the weakest implied growth rate among its dividend-paying peers. The group median is 5.6 percent, and the next-lowest implied rate is Tractor Supply Company (TSCO) at 5.387 percent. (See also: Dick's Sporting Goods Shares Have Worst Decline Since 2014.)

There is comprehensive evidence that Dick's is priced at a moderate to large discount relative to other mid-cap sporting goods and specialty retailers, based on a battery of valuation metrics. Dick's is slightly cheaper than peers on price-to-earnings, forward-price-to-earnings and the PEG ratio. The stock is substantially less expensive on the basis of enterprise-value-to-EBITDA and price-to-free-cash-flow. Half of the peer group members pay dividends, and Dick's is one of them. The stock is only more expensive than average according to the price-to-book ratio, although 2.32 for this ratio is not aggressively bullish.

DKS Relative Valuation Table

The body of evidence suggests that Dick's is indeed priced at a discount to peers after investor confidence soured. This does not necessarily mean that Dick's is worthy of a long position in a portfolio. If the company's fundamentals are inferior to those of comparable firms, this would represent a value trap. However, analyst outlook over the next five years for Dick's is not appreciably worse than it is for other mid-cap sporting goods and specialty retailers, so there appears to be a disconnect between investor opinion and analyst opinion. For long-term value investors who have a neutral or positive opinion of Dick's relative to retail in general, this could represent an opportunity to take advantage of market negativity to unlock value. Such an approach is not suitable for all investors, so be sure to verify that the stock's characteristics meet the required risk, growth and income requirements of a portfolio. (See also: Demand Strong in Sporting Goods.)

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.