Baird, SIG Bench Dick’s Sporting

After a report that Dick's Sporting Goods (DKS) is considering going private sent the stock higher Thursday, the sporting goods retailer got nailed today by a pair of downgrades.

The problem? Valuation

Baird cut the stock to neutral from outperform, arguing that its move into the mid $50s “has created a more balanced risk/reward profile.” Susquehanna, meanwhile, cut the stock to neutral from positive. As analyst Christopher Svezia wrote, "We continue to see some upside given manageable near-term (4Q) expectations and potential for healthy earnings recovery in FY15, but ultimately not enough to meet our +15% threshold.”

The stock fell 1.7% to $53.75 in recent trading.

CNBC on Thursday reported unusual options trading in Dick’s stock before a Reuters report surfaced that the retailer is holding early-stage conversations with a handful of buyout firms about going private.

Baird analysts addressed the issue in today's note:

With prospects of a go-private transaction now officially part of the story, downside risk appears somewhat limited in the near term. That said, the stock's current valuation (>9x FY14 EBITDA) is already entering levels consistent with recent takeout activity, and an improvement in fundamentals across early-FY15 appears somewhat discounted. While our model can get an LBO value north of $60, it’s not certain any transaction will occur. As a result, the stock’s risk/reward profile seems more balanced versus what we envisioned last summer.

Not everyone shares those concerns. Jim Chartier, an analyst at Monness Crespi Hardt, maintained a buy rating and raised his price target to $60 from $56. As he explains: 

The stock underperformed in 2014 as weakness in the golf and hunting categories resulted in lower than anticipated sales and earnings. In addition, investors have been concerned about the company's difficult same-store sales comparison in 4QFY14. We believe the potential for a private equity sale raises the floor in the stock in the near term. And, we expect easy sales and margin comparisons in 1HFY15 will attract investors if the company reports in line or better 4QFY14 results. Accordingly, we believe a higher valuation multiple is appropriate. The stock is trading at 17.6x our ntm EPS estimate of $3.11, in line with its three year average valuation of 17.7x. We are raising our price target to $60 (from $56) based on 18.5x our FY15 EPS estimate of $3.25.