Stock market

Is JD Sports still a value chain in disguise?

Image source: Britvic (copyright Evan Doherty)

a while ago, JD Sports (LSE: JD) seemed like a classic value share to me. It was selling for little more than a pound a share despite the company’s clear strengths, which ranged from a comfortable cash position on its balance sheet to a well-known brand in multiple markets around the world.

Recently, the share price of JD Sports has been moving upwards. It is now around £1.32. But, despite the recent upward momentum, the share price is only 8% higher than it was five years ago, despite the explosive growth the company has seen during that period.

So, while it may be less obvious than a few months ago when the price was lower, could it still be a piece of value for a long-term investor like me?

Large cash generating potential

I think the answer is yes. This explains why I have been buying shares for the past year and have no plans to sell my holdings.

At first glance, JD Sports might not seem like a high-priced segment. However, its price-to-earnings ratio of 35 isn’t cheap. Actually, it sounds high. That’s more than I would normally consider paying for a part, even in one FTSE 100 With a track record like JD Sports.

But this is where understanding how to read company accounts comes in handy. Those earnings are profits after taxes. Looking at the most recent full-year accounts, they came in at £227m. But looking higher up the profit and loss statement, operating income is above half a billion pounds.

Tomorrow (May 31), the company will unveil its final results for the past year. It has guided City to expect a profit before tax and adjusted items in the range of £915-£935m.

The company is a massive cash generator. It’s also consistently profitable — yet there’s a big difference between its reported earnings after taxes and its profits before taxes and adjustments. What is happening?

Investing in growth

In short, JD Sports is spending. so many

It is opening hundreds of new physical stores annually, expanding its already sizeable global presence. This risks making management too thin, but it can increase scale.

It is also acquiring competitors to help strengthen its footprint. Last month, for example, it announced a proposed takeover of a US rival. Habit.

Such spending could help JD Sports play to its strengths on the big stage. But it also explains why I see JD as a value share.

The retailer, if it chose, could turn off the spend faucets in short order and let a large portion of its large operating earnings filter down to the bottom line. Doing so may put a brake on growth, but the core business is strong and, in my view, can survive without further growth.

I believe the long-term value of JD Sports is higher than suggested by the current share price, although this is partially obscured by its aggressive and expensive expansion.

Getting it wrong is a potential risk. For example, if Hibbett’s acquisition does not deliver the expected benefits, it could prove to be a costly mistake.

Time will tell – but I own the shares and am optimistic about the outlook.


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