Dicks Sporting Goods Inc (NYSE:DKS) stock rocketed higher in afternoon trading Wednesday, after Reuters reported the sports goods retailer was engaged in early discussions about being taken private. DKS stock quickly shot up as much as 11% on the news.
Before the Reuters story, DKS stock had lost 15% in the last 12 months, underperforming the benchmark S&P 500 Index by a whopping 25 percentage points. This lackluster stock price performance is one of the reasons some analysts have previously floated Dicks as a buyout candidate.
Obviously the stock market is taking the Reuters report seriously; the fact that Bloomberg published an article just two days ago specifically naming Pier 1 Imports Inc (NYSE:PIR) and Dicks as two of the most likely retail stocks to be acquired in a leveraged buyout (or LBO) in 2015.
The dynamics of the current economy should encourage LBOs this year, the article says:
“’It’s an environment that is really good for LBOs,’ Oliver Wintermantel, a New York-based analyst at Evercore ISI, said in a phone interview. ‘It probably is here to stay, as long as the interest rate environment stays like it is. If you want to do it, you want to do it now.’”
Retailers are ideal targets for LBOs because
“…they tend to have steady cash flow and minimal debt, while offering opportunities for cost cuts and margin improvement. Rising equity values have made some targets expensive, though some bargains still exist.”
Dicks Sporting Goods fits the bill here: the company’s debt/equity ratio is below 0.2, and rising equity values certainly haven’t been an issue for DKS stock in the last year.
Perhaps DKS management sees the writing on the wall: The days of high growth are long gone, and the future may merely hold days of stagnant growth or even decline. Sales are expected to grow in the upper-single digits in FY 2015 and FY 2016, which isn’t bad, but it’s nothing to write home about, either.
Earnings growth is also noticeably decelerating. Earnings growth per share clocked in at 40% as recently as 2012, but EPS growth hasn’t topped 17% annually since then and analysts don’t expect it to in 2015 or 2016 either.
Today’s reports are certainly credible, but even if they’re true, speculating on the outcome of a buyout deal in the stock market is akin to hitting Vegas and “investing” at the craps table.
Shares of Pier 1 Imports also spiked after today’s Reuters report, which lent credence to the Bloomberg article two days ago that asserted the Fort Worth, Texas-based importer could be a LBO target itself. PIR stock was up about 5% in late trading.
Bed Bath & Beyond Inc. (NASDAQ:BBBY), another subject of the Jan. 5 LBO article, was also beating the market in late trading Wednesday. BBBY stock was up more than 3.5% at the time this article was written.
Of the four retail stocks the Bloomberg piece mentioned as potential LBO targets, only GameStop Corp. (NYSE:GME) dropped during the day’s trading.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.
