As a long-term shareholder in JD Sports (LSE: JD), I’m confused. The JD Sports share price looked cheap to me when it was well above £1. It’s now hovering around 80p, having fallen as low as 61p a couple of months back. That is a big jump, but from a long-term perspective, the share seems to be going nowhere fast. It’s tumbled 35% in just a year.
I’ve seen this as a buying opportunity and picked up more shares along the way (I sold some too but, overall, I now have more than a year ago). But the way the price has been moving still doesn’t make much sense to me.
I see JD Sports as potentially being a spectacular bargain – so why is the share price still in pennies?
Looks like a bargain
Last year’s adjusted basic earnings per share were 12.4p. Using that measurement, the FTSE 100 firm’s price-to-earnings (P/E) ratio is currently under 7. The statutory measurement of basic earnings per share, without the adjustments, was lower at 9.5p. Even using that though, the P/E ratio is under 9.
What about free cash flow? Last year’s accounts included a net £1.1bn spent on acquisitions. Taking them out of the picture, JD’s free cash flows last year were £683m. That is around one sixth of the current market capitalisation.
Here’s the opportunity I see
Using any of those measurements, the current JD Sports share price still looks very cheap to me. However, last year’s performance may not be indicative of what to expect in future. After all, JD’s issued multiple profit warnings over the past 18 months. A weak economy could hurt consumer spending, including on pricy sportswear.
On balance though, I still think this share looks cheap. A large US acquisition last year was a one-off cost. That has added significant scale and boosted sales volumes across the company.
While the strategy in recent years has been to expand the store estate through hundreds of new openings, the company’s now reining the programme in. That ought to mean more of its operating profit flows directly to the bottom line rather than being used to fund shopfitting.
The company ended last year debt-free, excluding lease liabilities, with £52m of net cash on its balance sheet.
The City’s lost its enthusiasm — I haven’t!
Given all that, something still doesn’t add up to me. I feel that many investors have fallen out of love with JD Sports, which for some years was a star performer on the London market. From March 2015 to November 2021, for example, the JD Sports share price soared around 1,100%.
Those days are long gone. I think the weak economy, profit warnings and ongoing challenges for JD’s key supplier Nike may have made many investors wary of the prospects for JD Sports. Those issues remain undeniable risks.
However, I think the share price is difficult to justify given the company’s proven business model, large and growing global footprint, net cash position (excluding lease liabilities) and ongoing customer demand.
I consider JD Sports to be badly undervalued and have no plans to sell my shares. It is really worth considering, I feel.
