JD Sports Fashion (LSE:JD.), the FTSE 100 leisure retailer, looks to be a bit of a bargain to me. For the year ending 1 February 2025 (FY25), analysts are expecting earnings per share of 13.1p. If their predictions prove to be correct, it means the stock’s currently (18 December) trading on a forward price-to-earnings (P/E) ratio of just 7.4.
Critics will point out that this earnings figure is only marginally higher than the one reported for FY22 (12.84p). However, at one point in November 2021, the company’s shares were changing hands for 233p. At that time, the stock was trading on a multiple of 18.1 times earnings.
But this more generous valuation might have moved too far in the other direction. However, if we split the difference and assume a multiple of 12.8 is fair, it could be argued that the stock is currently undervalued by 73% (71p).
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Huge potential
This doesn’t seem unreasonable to me.
The company recently completed two acquisitions that will add over a third more stores to its expanding footprint. It now has a presence in America and a smaller foothold in Western Europe and North West Africa.
And the global sportswear market is forecast to grow by 6.6% a year over the next seven years, with so-called ‘sports fashion’ driving this expansion.
According to the company, its target market of 16 to 24-year-olds consider sportswear as their first choice when it comes to spending their discretionary income.
Trouble afoot?
But investors appear wary — JD Sport’s share price has fallen approximately 40% since the middle of September.
They appear to have a concern that the company’s over-reliant on Nike. The British retailer claims to be the American’s number one global partner. As the chart below shows, the share prices of the two companies appear to move in tandem.
And Nike is struggling.
In an attempt to cut out the ‘middle man’ (one of which is JD Sports), it tried to sell more of its clothing and trainers directly to consumers. This didn’t work and — along with a lack of product innovation and a dependency on ageing legacy brands — has contributed to a fall in sales and earnings.
But I wouldn’t write off the American giant just yet.
In November, its website reported 166m hits and it remains (by a long way) the biggest sportswear company in the world. And there appear to be some green shoots of a recovery, particularly among runners, although the company’s chief financial officer recently warned that “a comeback at this scale takes time”.
Another concern is that JD Sports pays a meagre dividend — the stock presently yields less than 1%. This means if there’s any sign of a slowdown in earnings growth then shareholders might feel there’s little point retaining a position. This makes the share price particularly vulnerable to bad news.
A golden opportunity?
And that’s what happened in November, when the company released its third-quarter trading update.
It reported: “The trading environment remains volatile … we now anticipate full-year profit to be at the lower end of our guidance range.”
The shares fell 10.7% on the day.
Prior to the fall, I thought the shares were cheap. Now, in my opinion, the stock’s probably the cheapest on the FTSE 100. That’s why I plan to hold on to my shares.
