The JD Sports Fashion group owns several brands, including Blacks and Millets. Photo: Alamy
JD Sports (JD.) stock price has taken a hit lately. Its shares are down 45% so far this year.
At the end of November 2021 the stock was trading at around 234 pence, fell to around 215 pence in early 2022 and has since headed full speed south, currently languishing at the 119 pence level.
The dramatic drop can be explained to some extent by the cost of living crisis and the impact on non-essential retailers like JD Sports.
The company’s fine in August by the Competition and Markets Authority (which was related to JD Sports’ breach of obligations regarding an investigation into the takeover of smaller rival Footasylum), will not have helped either.
Is JD Sports Fairly Valued?
But the question is whether the stock should be at the level it is. Earlier this month, JD Sports Fashion upgraded its earnings forecast for the year. The group, which includes brands such as Millets, Tessuti, Blacks and Millets, said it now expects annual pre-tax profits to reach £940m and estimated profits for the current financial year to be at least equal to that. .
For the 14 weeks ending May 7, 2022, the company also showed similar business more than 5% higher than the same period in 2021.
While the board emphasized that it was aware of headwinds, including the overall global macroeconomic and geopolitical situation, the trade update accentuated the positive. It is true that JD’s share price rose after the upgrade to around 131 pence, but quickly fell back after its current level of 119 pence.
Jason Hollands, CEO of Bestinvest, believes that JD has fallen victim to the current economic environment, but sees a lot to recommend the company at this point.
“Consumer discretionary stocks are having a tough year due to runaway inflation headwinds that are going to reduce consumption and therefore even the best players will be caught in the crosswind as asset managers assets reduce exposure.
That said, he emphasizes that JD Sports’ sales have been holding up very well and have so far managed to avoid supply chain disruption.
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He adds: “Despite these short-term pressures on consumers, JD Sports is big business. It has very strong relationships with Adidas and Nike, as the second largest marketer of both brands globally, which it has effectively leveraged to the extent that 30% of the product is exclusive to JD Sports.”
“The stock is trading at a very attractive 16x future earnings multiple for a high-quality business with an 8% free cash flow return.”
Danni Hewson, financial analyst at AJ Bell, sees JD Sports similarly to Hollands.
“Investors are paying close attention to consumer confidence levels and the outlook from retail giants who warn sales will fall as budgets get tighter. JD Sports has undoubtedly been caught up in the stampede to exit and will not be immune to the current cost of living crisis.”
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People will cut back on discretionary spending and sales will take a hit, Hewson says, but does that make JD Sports a bad long-term bet? She insists that the ‘long term’ is the time horizon investors should be concerned about and this may well cause them to look with interest at the company’s current share price.
“Last year profits have soared and the company does not expect the elevated levels to be materially affected by the current economic climate.
He adds: “Yes you are dealing with supply issues, yes people are going back to the office and yes some customers will make cautious decisions, but you have strong growth plans and many of your customers are not paying their home energy bill.
“They’re younger, with fewer demands on their income, and most workplaces don’t ask staff to ditch casual attire, particularly those ridiculously priced sneakers.”
MarketBeat’s consensus forecast (of 10 analysts) rates JD Sports as a ‘buy’. This is made up of eight buy recommendations, two ‘hold’ ratings, and no ‘sell’ ratings.
Simply Wall St rates JD Sports ‘significantly below fair value’. He sees reasonable value around the 305p level.
also forecast J.D. Sports Return on equity being tall in three years (21.6%).
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Source: capital.com