To me, JD Sports (LSE: JD) looks like a potential long-term bargain. It has done for a while now. But while it moves up and down, it continues to sell for pennies. It last sold for £1 or higher in October.
Is this a new reality for the share, or simply a prolonged opportunity to snap up the share for less than it is worth?
This isn’t a cut and dried case
The answer is a bit hard to call with confidence at this point. On many metrics, the JD Sports share price looks cheap to me. But that has been clear for several years already.
While there are occasional spurts up, they tend to fizzle out before the share then slides down again.
The share is now 57% cheaper than it was five years ago.
The optimist in me thinks that makes it a real bargain, given JD’s global reach, strong brand, solid profitability and ongoing prospects. It helps explain why JD Sports continues to hold a significant place in my portfolio.
But the pessimist in me wonders why a FTSE 100 share I find so attractive could have more than halved in five years. Could doubters be right about the risk that costly expansion may eat into profit margins?
Might JD’s competitive advantage be slimmer than I think, especially if a weak economy means shoppers feel less inclined to pay premium prices for sports shoes and athleisure?
Those doubts help explain why, although I have bought JD Sports shares when the price has dipped, I have also sold some over the past year to bank some profits.
Why this could hit £1 again
Clearly, a lot of investors no longer have much enthusiasm for JD Sports. Why?
Revenues have grown strongly, reflecting the company’s global expansion of recent years. Last year alone, for example, they were up 11%.
The issue has been about profits. Operating profits last year fell 13% — never a good sign, but notably so given that sales growth was strong. That translated into a 9% fall in basic earnings per share.
Still, basic earnings per share came in at 8.6p. That means the 1.2p per share dividend was covered over 7 times by earnings. The dividend is also amply covered by cash flows. The shareholder payout last year cost £52m. Compare that to the £1.4bn of net cash generated by operating activities.
Yes, there are other non-operating expenses to pay and they are substantial. Still, although no dividend is ever guaranteed, that coverage is unusually strong.
The balance sheet also looks decent. Excluding property leases, the company ended its most recent financial year with net cash of over £300m. All this for a company with a market capitalisation of just £4.0bn.
The price-to-earnings (P/E) ratio of 10 looks cheap to me given the business prospects and its strong financial condition. Even a £1 share price would only mean a P/E ratio of 12, which I think is completely viable for this quality of business. The current average FTSE 100 P/E ratio is already well above that, at around 16.
Still, without some strong news to force a City reassessment, the JD Sports share price could continue to tread water for a while yet, I reckon.
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Christopher Ruane owns shares in JD Sports.
