Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business model could help get it back on top.

| More on:

Image source: Britvic (copyright Evan Doherty)

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Looking at the share price of JD Sports Fashion (LSE:JD) over the past five years, it has moved in the right direction – but not dramatically. In that period, the shares are up 22%.

But if I had bought the shares five years ago and sold them in November 2021, I would have seen my holding increase by over 130% in value.

Since then, the share price has almost halved.

So, if I buy now, might I hope to see the price double again in the coming five years? After all, that would only require the shares hitting the same price that they reached in 2021.

Proven business model

Yes, I do think the shares could double in the coming half-decade.

I have added more to my portfolio in recent months precisely because I felt the share price looks attractive.

JD has a simple but proven model — a retail estate spanning physical stores and a big online presence, across markets from Europe to Australia to the USA.

That has been the lever for explosive growth. Revenues have surged.

Source: TradingView

I expect that to continue. The company plans to open hundreds of new stores annually. Last year alone it opened over 200.

This expansion has added economies of scale and helped deepen the brand’s appeal, customer base and operational expertise. I think those are all competitive advantages.

Not only has revenue soared, so has operating income.

Source: TradingView

Prospects of future success

But businesses can face lots of non-operating costs, especially if they want to spend money on significant expansion.

That helps explain why, despite operating income of close to £1bn annually, earnings per share at JD Sports are fairly small, at under 3p.

Source: TradingView

That suggests the company is trading on a price-to-earnings ratio of around 45. That does not sound cheap at all.

But with the company selling for around £6.4bn in total, while holding over £1bn in net cash, I think the valuation actually is attractive.

After all, the company seems to have strong growth prospects.

Upbeat trading statement

That has been affirmed today (28 March) after the release of a trading statement covering last year.

In January, the JD Sports share price crashed after a profit warning. It reduced forecast profit before tax and adjusted items for last year to be £915m-£935m. The business said today it has delivered on those expectations.

For the current year, before any accounting adjustments, it expects pre-tax profit of £900m-£980m. Seven weeks into its current financial year and trading has been in line with expectations, according to the update.

The sportswear market has been hugely competitive, leading to heavy discounting. That remains a risk to profit margins at retailers including JD Sports.

But in a tough market, it is holding its own and expanding.

I expect the company to grow sales significantly and see its price relative to pre-tax profit as a bargain.

Could we see the old JD Sports share price matched in coming years, meaning the shares double from today? Possibly, if earnings per share also grow strongly enough from where they are. The company could achieve that by cutting non-operating costs, growing revenues substantially or both. I see those as possibilities in coming years — but there is a lot of work still to be done.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in JD Sports Fashion. 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.

More on Investing Articles

Young Black man sat in front of laptop while wearing headphones
Investing Articles

Investing just £10 a day in UK stocks could bag me a passive income stream of £267 a week!

This Fool explains how investing in UK stocks rather than buying a couple of takeaway coffees a day could help…

Read more »

Investing Articles

A cheap stock to consider buying as the FTSE 100 hits all-time highs

Roland Head explains why the FTSE 100 probably isn’t expensive and highlights a cheap dividend share to consider buying today.

Read more »

Investing Articles

If I were retiring tomorrow, I’d snap up these 3 passive income stocks!

Our writer was recently asked which passive income stocks she’d be happy to buy if she were to retire tomorrow.…

Read more »

Investing Articles

As the FTSE 100 hits an all-time high, are the days of cheap shares coming to an end?

The signs suggest that confidence and optimism are finally getting the FTSE 100 back on track, as the index hits…

Read more »

Investing Articles

Which FTSE 100 stocks could benefit after the UK’s premier index reaches all-time highs?

As the FTSE 100 hit all-time highs yesterday, our writer details which stocks could be primed to climb upwards.

Read more »

Investing Articles

Down massively in 2024 so far, is there worse to come for Tesla stock?

Tesla stock has been been stuck in reverse gear. Will the latest earnings announcement see the share price continue to…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Dividend Shares

These 2 dividend stocks are getting way too cheap

Jon Smith looks at different financial metrics to prove that some dividend stocks are undervalued at the moment and could…

Read more »

Investing Articles

Is the JD Sports share price set to explode?

Christopher Ruane considers why the JD Sports share price has done little over the past five years, even though sales…

Read more »