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Is this the best growth buy of 2018?

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January’s flood of updates from high street retailers continued apace this morning with news on recent trading at self-styled ‘king of trainers’ JD Sports (LSE: JD). In my view, now would be as good a time as any to buy a slice of the company. Here’s why.

Christmas cheer

According to the £3.5bn cap, recent positive trading has continued through the second half of its financial year, including the key festive period. Like-for-like sales growth at its stores held steady at roughly 3% with additional sales coming from “material growth” online and ongoing international expansion. As highlighted by the company, this performance was “particularly encouraging” given the rate of sales growth (and therefore tough comparatives) achieved over recent years. 

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Perhaps most positively, JD announced that pre-tax profit for the full year would now be around £300m — up on previous market expectations of between £270m to £295m. Contrast this with the simply awful recent statements from other high street operators such as Debenhams and Mothercare and you get some idea of just how well the firm is performing.

Aside from today’s update (and its proven ability to consistently deliver the goods), another huge attraction to JD’s shares at the current time must be the fact that they are currently trading quite some way away from the 450p peak hit in May last year. Earnings estimates for the company’s next financial year (beginning 29 January) leave the Bury-based business on a price-to-earnings (P/E) ratio of just 14. For that, new investors get a company generating excellent returns on the money it invests, boasting enviable free cash flow and possessing a bulletproof balance sheet.  

JD might not end up being the best growth purchase in 2018 but — at this price — it might not be far off.

A poor substitute?

One company I’d be less inclined to invest in at the moment is JD’s retailing peer Sports Direct (LSE: SPD).

Despite group revenue increasing 1.2% over the six-month period to 29 October (or 4.7% when acquisitions, disposals and currency fluctuations are taken into account), December’s interim results revealed a 1% dip in UK retail sales as a result of “reduced online promotional activity and store closures“. In addition to this, reported pre-tax profit plummeted by 67.3% to just under £46m, with levels of debt continuing to swell thanks to investment and share buybacks.

Changing hands for just under 20 times earnings, Sports Direct’s shares look fairly fully valued at the moment, even if the company anticipates underlying EBITDA growth of between 5% and 15% for the full year. Perhaps that’s why the shares have lost momentum over recent months, falling 10% from the highs achieved last summer. When you consider that some holders will have bought into the company when it traded around the 250p mark, it’s not entirely unreasonable that some will be wanting to bank profits.

Moreover, any prospective owners need to be comfortable with the company’s ‘interesting’ approach to corporate governance and its apparent inability to stay out of the headlines for long. Recent less-than-favourable coverage has included being exposed for paying its staff below the minimum wage and a shareholder revolt following CEO Mike Ashley’s attempt to award his former IT chief (and elder brother) £11m — rather ironically — because he had been underpaid for previous work. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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