There's No Escaping DICK'S Sporting Goods, Inc.'s (NYSE:DKS) Muted Earnings

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may consider DICK'S Sporting Goods, Inc. (NYSE:DKS) as an attractive investment with its 15.4x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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Recent times have been advantageous for DICK'S Sporting Goods as its earnings have been rising faster than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for DICK'S Sporting Goods

Does Growth Match The Low P/E?

DICK'S Sporting Goods' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. However, this wasn't enough as the latest three year period has seen a very unpleasant 18% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 5.7% per annum over the next three years. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader market.

In light of this, it's understandable that DICK'S Sporting Goods' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of DICK'S Sporting Goods' analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with DICK'S Sporting Goods (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on DICK'S Sporting Goods, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.