The JD Sports share price is rising: should I buy now

The JD Sports share price is up 50% in the past year. Will the stock continue to rise? Royston Roche makes a deep dive analysis of the stock.

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The JD Sports (LSE: JD) share price rose about 50% in the past year. It has outperformed the benchmark FTSE 100 index, which rose about 15% during the same period.

Here, I consider the pros and cons of investing in this stock for my portfolio.

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Fundamental analysis

JD Sports’s revenue growth has been extraordinary. Revenue grew from £2.4bn in the fiscal year 2017 to £6.1bn in 2020, growing at a CAGR (compound annual growth rate) of 37%. However, in the fiscal year 2021, the Covid-19 pandemic slowed down growth by 0.9% to £6.2bn. The performance is not bad since many retail stores were closed. Also, it was offset by an increase in online sales. To cope with the strong online demand the company entered a deal with Clipper Logistics to provide e-fulfilment services.

JD Sports’s profits grew from £184.6m in 2017 to £229.2m in 2021. It has maintained a decent profit margin during this period. It was slightly down, to 3.7%, this year due to Covid-19. Management expects profits in 2022 to exceed pre-pandemic levels, which is positive for the JD Sports share price.

Globally, profit margins for the company’s US operations were better this year due to lower promotional activity. It also benefitted from strong demand helped by the US government stimulus. Better profits from global operations have led the company to resume its dividend payments. The board has proposed a modest dividend of 1.44p for 2021. 

Net cash from operations improved to £1.1bn from £854m for the previous year. Cash generation was strong in the US thanks to exceptional trading this year. The balance sheet is strong. It had a net cash position of £795.4m at the end of 30 January 2021. It also raised equity of about £456m in February, which will be used mainly for acquisitions. 

The JD Sports share price – risks to consider

The company had robust historical revenue growth. However, given Covid-19, the global economy will take some time to recover. So, in my opinion, the growth rate might slow down. This might hurt the JD Sports share price.

JD Sports will face stiff competition from other retailers like Sports Direct, which has plans to expand in the UK and Europe. The company will also face competition from brands like Adidas and Nike that are selling directly to consumers. They are targeting direct customers in order to benefit from better margins and valuable customer data.

The company is currently trading at a price-to-earnings ratio of 39.81 compared to its five-year average of 24.75. The JD Sports share price is trading at a premium to its historical average after the strong performance at the bourses.

Final view

Taking all things into consideration, I like the company’s strong growth. However, I am a bit worried about the rising competition, which might derail that growth. Also, in my opinion, JD Sports shares are not a value buy. So, I am not a buyer of the stock today.

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Royston Roche has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Nike. The Motley Fool UK has recommended Clipper Logistics. 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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