Are Mike Ashley stocks Sports Direct International Plc & Debenhams Plc a buy despite BHS failure?

When it came to the crunch, it seems that Sports Direct International (LSE: SPD) founder Mike Ashley could not be persuaded to take an interest in BHS. Sports Direct reportedly considered making an offer for BHS, but opted not to, paving the way for the chain’s collapse into administration on Monday.

I suspect this decision will prove to be good news for Mr Ashley’s shareholders. BHS reportedly has a £571m pension deficit and significant liabilities that it cannot meet. Mr Ashley may attract criticism for trying to run his public company like a private business, but he does have a very good record as a retailer.

Sports Direct has doubled its sales from £1.4bn to £2.8bn since 2010. Over the same period, after-tax profits have risen from £89.4m to £240.4m — a 168% increase. Throughout this period Sports Direct has maintained a strong balance sheet which today carries almost no debt.

Bounce back?

The only problem is that all this is in the past. Since August last year, Sports Direct shares have fallen by 50% to about 400p. Over the same period, City analysts have slashed this year’s earnings forecasts from 43p per share to just 35p. Is it too late for private investors to profit from Mike Ashley’s abilities?

I’m not so sure. One thing that’s worth noting is that based on forecast earnings, Sports Direct shares are a lot cheaper than they were in August last year. Back then, the shares were trading at about 800p with forecast earnings of 43.2p per share for 2015/16. That’s equivalent to a forecast P/E of 18.5.

Today, Sport Direct shares trade on a forecast P/E of just 11.5. That looks reasonably cheap to me given the firm’s strong balance sheet. There’s also a possibility that Mr Ashley will take advantage of Sports Direct’s depressed share price and use his 55% shareholding as the basis for a bid to take the firm private again.

We don’t know what will happen, but I think there’s a reasonable chance Sports Direct could bounce back strongly over the next year or two.

My favourite Mike Ashley stock

Personally, I wouldn’t invest in Sports Direct because it doesn’t pay a dividend. I’m more interested in another retailer in which Mike Ashley has a strong involvement, Debenhams (LSE DEB).

Sports Direct holds options giving it the right to buy a 10.5% stake in Debenhams. The firm has begun to trial Sports Direct concessions in Debenhams stores. This isn’t the first time that Mr Ashley has taken a declarable interest in a major UK retailer, and we don’t know the reasons for his decision.

Some industry analysts argue that Mr Ashley’s main goal is to improve his access to premium brands such as Nike, rather than because he believes Debenhams is a bargain. My guess is that the real answer might be both of these.

Debenhams’ recent interim results were reassuring, in my view. The figures didn’t contain any nasty surprises and showed a 1.6% rise in sales and a 5.5% increase in pre-tax profits, which rose to £93.8m.

The shares currently trade on a 2016 forecast P/E of 10 and with a forecast yield of 4.4%. That looks good value to me and I’ve added Debenhams to my own watch list as a possible buy.

However, Debenhams and Sports Direct were not chosen by the Motley Fool's retail experts for their latest wealth report, A Top Growth Share From The Motley Fool.

The stock chosen was another well-known UK retailer. The company concerned is profitable and is expanding aggressively overseas.

The Fool's experts believe the value of this business could rise by more than 200% over the next few years.

The good news is that this report is FREE and carries no obligation.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.