5 reasons why this ex-FTSE 100 company is simply too cheap

There’s no denying it’s been a horrendous year for Sports Direct (LSE: SPD), with the stock falling around 60% since last December. 

In this time we’ve seen a profit warning from poor sales over Christmas 2015, a government-led investigation into warehouse working conditions, a £15m currency loss, the sudden resignation of the long-term CEO, no permanent CFO elected, and pressure from investors for the chairman to step down. To top it all off, the stock has fallen out of the FTSE 100 index.

With the media constantly vilifying the company, it’s understandable that sentiment towards the stock is low right now. So is it game over for Sports Direct or is there a disconnect between the long-term fundamentals of the company and the share price? I’m inclined to believe it’s the latter. Here’s five reasons why.

Low P/E

On last year’s earnings of 35.5p, Sports Direct trades on a P/E ratio of just 8.9. While I don’t expect earnings for FY2017 to be anywhere near that level, even if they come in at 19.9p as analysts forecast, that’s still only a P/E ratio of 15.8, not unreasonable for a company that has grown its revenues at a compounded annual growth rate (CAGR) of 13% over the last five years.

Peer comparison

Given that rival JD Sports Fashion (LSE: JD) trades on a forward P/E ratio of 21.1, Sports Direct looks cheap in comparison. Furthermore, while JD has the larger market cap, Sports Direct trumps its competitor in terms of revenue, generating £2,904m last year compared to JD’s £1,822m. And with Sports Direct trading on an enterprise value (EV)-to-sales ratio of just 0.8, compared to JD’s 1.1, it further reinforces my view that the company is undervalued. 

Skin in the game

Sports Direct owner Mike Ashley clearly needs to work on his PR skills, with many of his actions directly affecting the company’s share price. However, it must be remembered that Ashley owns 56% of the firm and therefore his interests are likely to be aligned with those of shareholders. He built up the business from scratch and I find it hard to believe that he wouldn’t want to maximise the value of his shareholding.


Furthermore, Ashley has proven to be quite an astute stock picker in recent years, taking equity stakes in Tesco and Debenhams that have been profitable for Sports Direct. With the company recently announcing a buyback of 30m shares, it suggests that Ashley sees value in the current share price. Would he be buying shares back at 300p if he believed he could buy them cheaper in future?


Lastly, Sports Direct appears intent on turning its image around and this is a positive for shareholders. Not only is the company looking to improve its corporate governance, but the sports retailer is also looking to transform itself into more of a top-end retailer, with Ashley stating that he wants to turn Sports Direct into the “Selfridges of sports retail.”

Sports Direct reports its half-yearly results tomorrow and while the numbers aren’t likely to be pretty, I believe it’s worth looking beyond the troubles of the last year and instead focusing on the long-term fundamentals of the company. For those with patience, I believe the shares offer good value.

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Edward Sheldon owns shares in Sports Direct International. 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.