Morningstar Pegs an Oil Company, Retailer as Overvalued

With the S&P 500 down 20% so far this year, many stocks look attractive. But not these two, Morningstar says.

With the S&P 500 down 20% so far this year, many stocks may represent buying opportunities.

Indeed, Morningstar estimates that U.S. equities were about 18% undervalued as a whole as of Oct. 27.

But some are still overpriced in the research firm’s view. That includes oil producer Marathon Oil  (MRO) – Get Marathon Oil Corporation Report and sporting goods retailer Dick’s Sporting Goods  (DKS) – Get Dick’s Sporting Goods Inc Report.


Marathon Oil

Morningstar analyst Dave Meats assigns the company no moat (competitive advantage) and puts fair value for the stock at $18. It recently traded at $31.

To be sure, much of his commentary about the company is positive. “The firm has a dominant position in the Bakken and Eagle Ford plays, which together comprise over half of its current production,” Meats wrote.

“In both plays it has substantial acreage in the sweet spots, which are characterized by exceptionally strong initial production rates.”

However, “not all of the firm’s acreage is located in these stand-out areas,” Meats said. “Management will need to continue improving the firm’s capital efficiency to preserve its margins when it starts running out of top-tier drilling opportunities.”

And there’s another problem.

“What’s unusual about Marathon’s capital return framework is the emphasis on distributing a portion of its operating cash, rather than free cash, which theoretically prioritizes shareholder returns ahead of capital spending,” Meats said.

“However, to deliver these returns, the firm supplements its modest base dividend with buybacks, rather than variable dividends,” he noted.

“As it will have cash to distribute during upcycles, this strategy risks disproportionate share repurchases during upcycles, when the price is probably least favorable.”

Dick’s Sporting Goods

Morningstar analyst David Swartz gives the company no moat. He puts fair value for the stock at $78. It recently traded at $116.

“Dick’s lacks an edge, as sporting goods are sold through many channels,” Swartz wrote in a commentary. “Although its sales have been very strong over the past two years, we believe a slowdown is likely.” That’s because Dick’s and others benefited from the covid outbreak.

Sporting goods retail sales showed average annual growth of just 1.3% in the five years before the pandemic, amid stiff competition, Swartz noted.

That competition includes Amazon, Walmart, Lululemon, Foot Locker, Bass Pro Shops/Cabela’s and branded stores/e-commerce platforms. He predicts compound average yearly sales growth of just 3% for Dick’s over the next decade.

“Dick’s recent profitability has greatly improved, but we do not think the gains can hold,” Swartz said . “The firm recorded a 16.5% operating margin in 2021, … but its operating margins were only in the mid-single digits in the years before the pandemic.”

The 2021 figure was a peak, Swartz said. “We expect Dick’s operating margins will trend downward over time due to a lack of pricing power.” Dick’s also has too many stores, he said.  

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