Is JD Sports a value share – or value trap?

Christopher Ruane is considering buying a well-known value share for his portfolio — but what about the risks? Here he weighs both sides.

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For a company that sells running shoes by the truckload, JD Sports (LSE: JD) can sometimes look as if it is going nowhere fast. Over the past year, for example, the JD Sports share price is flat, having moved just a fraction of 1% overall despite some big swings along the way. From a five-year perspective, the share has fallen 17%. Given the company’s proven business model and massive growth plans, does that make it a value share I ought to buy for my portfolio? Or could it be a value trap?

In praise of the King of Trainers

The investment case for JD Sports is fairly straightforward.

Globally, there is a large market for sportswear and I expect that to remain the case. On one hand, barriers to entry may seem small. On the other, though, this is a market where economies of scale can pay off.

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JD Sports has proven it can make money selling trainers and other sportswear. It has expanded its business far beyond its UK base, with a big acquisition in the US this year further boosting its footprint. That has helped the company increase its number of stores by around a third since the start of this year, to around 4,500.

The company has also been aggressively expanding its estate of shops through hundreds of new openings a year, including its biggest ever store that opened this year in east London.

While bricks and mortar is important to the retailer, it also has a thriving digital business. With a strong brand, large customer base, and economies of scale, it is a strong-performing retail business.

Its revenue in the first half topped £5bn and it had a net cash position. Yet its market capitalisation is £6.6bn. I see that as fairly modest for a business that expects its full-year profit before tax and adjusting items to be close to £1bn.

Some reasons to be wary

But while that profit figure is impressive, profit after tax last year was £605m – still impressive, but far off £1bn. This year could also see a big gap between the guidance and profit after tax, thanks to those adjusting items.

Created with Highcharts 11.4.3JD Sports Fashion PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Growing the store estate organically takes money and so do the sort of deals that helped the company boost its US presence this year. While it still has no net debt, its net cash position was substantially reduced by the US acquisition.

Spending to grow is an old retail strategy and it can work well, especially when the basic formula is strong. But it can also be a costly mistake. JD Sports has proven resilient amid a weak global economy, but that might not last. Meanwhile, its rapid expansion poses executional risks. If management does not deliver on its goals, the shares could yet turn out to be a value trap.

On balance, though, I continue to like the business. I am considering adding the shares back into my portfolio in coming weeks.

Pound coins for sale — 31 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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