The JD Sports Fashion‘s (LSE:JD.) share price has fallen 30% over the past year. A couple of profit downgrades have dented confidence in the business. And fears of a global economic slowdown haven’t helped.
However, on 9 April, the company issued an update confirming that trading was in line with revised expectations. The share price closed the day 9.5% higher. Since then, the stock’s rallied a further 14.5%.
Nothing to see here
The rebound suggests investors are unconcerned that if President Trump’s threatened tariffs are enacted, athleisure prices are likely to increase for US consumers. That’s because most are manufactured in countries that have large trade surpluses with America. This means they will probably face the biggest import taxes.
And the consequences for JD Sports could be significant. Following the acquisition of Hibbett, North America’s now a key market for the group.
If the planned tariffs are implemented after the current 90-day suspension expires, the group will have a difficult decision to make. Higher prices are likely to lead to lower sales and falling earnings. But not passing on the additional costs to consumers will result in a reduced margin. Either way, the group loses.
However, leaving the issue of tariffs to one side — and despite the recent resurgence in its share price — I continue to think the group remains undervalued.
Let me explain.
Across the pond
When JD Sports first ventured into the US market, it established an American holding company called Genesis. As well as giving cash to the sellers of businesses that it bought, some of the acquisitions in the territory involved issuing shares in Genesis. After a recent re-negoitation, these are now due to be repurchased in 2029-2030.
On a recent earnings call, the group’s chief financial officer, Dominic Platt, explained that for the purposes of these deals, the US business is valued at 6.5 times EBITDA (earnings before interest, tax, depreciation and amortisation) less net debt. He said this would be a “good benchmark” to use to value the group as a whole.
So let’s do this.
Number crunching
Platt pointed out that the group’s EBITDA over the past three years has been around £1.3bn. But he didn’t give any indication as to how to calculate net debt. The company’s latest balance sheet (at 3 August 2024) shows this to be £2.84bn.
However, if lease liabilities are excluded, the figure’s £41m. Leases are sometimes removed from these calculations as they are usually associated with a corresponding asset of a similar (or greater) value.
Depending on which definition of net debt is used, this gives a potential value for the group of around £5.6bn-£8bn.
Its current (2 May) market-cap is £4.1bn, implying a potential 37-95% uplift to today’s share price.
Even at the top end of this range, I think this is a sensible valuation. It would be equal to 12.8 times the group’s expected 2025 earnings per share of 12p. This is comfortably below that of many other fashion retailers including, for example, Next.
The business has also recently expanded into Europe which, along with its US operation, means it’s less reliant than previously on UK customers. It also claims to be the market leader in seven European countries.
On this basis, investors could consider adding JD Sports shares to their portfolios.
