This Is the Stock to Get You in the Game

This article is part of ourRising Star Portfoliosseries.

"If you watch a game, it's fun. If you play it, it's recreation. If you work at it, it's golf."
--Bob Hope

The legendary comedian hit the nail on the head. As a golfer for almost my entire life, I've put in a lot of hours working to get better. In fact, sports in general have played an integral part in my life, all the way down to my fantasy football team. Now it's my portfolio's turn, and Dick's Sporting Goods (NYS: DKS) is finally earning a spot in the starting lineup.

The business
Dick's Sporting Goods dates all the way back to 1948 when Richard Stack (father of current CEO Edward Stack) opened a bait and tackle store in Binghamton, N.Y. In 1984, when Edward took over the CEO reins, there were still only two stores in existence.

Today Dick's is a leading full-line sporting goods retailer with 474 namesake stores in 42 states along with 81 Golf Galaxy stores in 30 states. And with exposure to popular worldwide brands including Nike (NYS: NKE) , Under Armour (NYS: UA) , and Columbia Sportswear (NAS: COLM) to name just a few, the stores have something for just about every athletic endeavor.

Three ways to win
Room to grow: With the current store count, management still sees plenty of room to grow. And with relatively minimal exposure to the West Coast, they're targeting another 400 more stores over the next several years to build out that presence. This means plenty of top-line growth opportunity.

A unique experience: Retail is cutthroat and competitive advantages are hard to come by. Specialty retail like sports is a bit different in that it focuses on a particular segment and Dick's interactive "store within a store" concept gives a unique and distinct feel to each department. So when you're looking for golf stuff, you go into the Golf Pro Shop (or better yet, head on over to your local Golf Galaxy). You say you're an angler? The Lodge, geared toward hunting and fishing equipment, is where you want to be. It's a superior in-store experience compared to competitors like Wal-Mart (NYS: WMT) , Target (NYS: TGT) , or even (NAS: AMZN) , where there's no store to begin with.

Market share: Sports apparel is a huge market, generating revenue in the neighborhood of $70 billion to $75 billion annually, and growing. Considering the company has grown revenue about 19% annually over the last 10 years, it stands to gain more share of this massive market as it continues to grow its presence.

Three strikes and you're out
Competition: Of course when you think retail, Wal-Mart, Target, and Amazon are all much bigger companies. But they also sell everything under the sun, whereas Dick's focuses on sporting goods. Private competitor Sports Authority has about the same number of stores but has regularly lower net margins.

The big macro: Until we see some substantial improvement in the economy, there are a number of macroeconomic concerns, from unemployment to inflation and everything in between. There's not much we can do about that, but if the company resorts to big discounts, margins will suffer.

Duality: I'm not usually a big fan of dual-class share structures, and the Class B shares held by the Stack family get 10 votes to each common share's one vote. This ostensibly puts all the power in the Stack family's hands. Given that they have such a large interest in the company (CEO Edward Stack alone owns about 19% of the shares outstanding), I'm willing to take a shot.

How much are tickets?
The company itself is in excellent financial shape. The balance sheet boasts over $340 million in net cash, and management even saw fit to start paying an annual dividend this year with the intention of a quarterly dividend starting in 2012 -- an excellent way to return value to shareholders, in my opinion.

While the stock when I first starting looking into it back in August (trust me, I'm still kicking myself), it's still a fair price today for the growth prospects ahead. In the quest to essentially double the total store footprint over time, I see top-line revenues continuing to grow at a considerable pace, and if they can achieve just half the previous decade's growth over the coming decade, I can see shares being worth in the neighborhood of $40 today, give or take. This also assumes an improving margin picture thanks to scale, so I'll need to keep an eye on margins as well. Again, this is a play on the growth of the company, so I plan on holding these shares for a long time.

The post-game show
I've been following Dick's Sporting Goods for about a year and am a little ticked at myself for not adding it sooner. So now I'm adding $1,000 worth of shares representing a 6% position of my original capital. As my cash balance continues to grow, I can certainly see adding to this position as well, especially as I'm sure there'll be an even more attractive price down the road. For now, though, I'm putting a tee in the ground and letting it rip. Make sure to swing by my discussion board and let me know what you think of this latest addition.

At the time thisarticle was published Stock Advisor analystJason Moserowns shares of here to follow Jason on Twitter.The Motley Fool owns shares of, Under Armour, and Wal-Mart Stores.Motley Fool newsletter serviceshave recommended buying shares of Nike, Under Armour, Wal-Mart Stores, and, and have recommended creating diagonal call positions in Nike and Wal-Mart Stores. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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