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Successfully sniffing out value shares is the key to profitable investing. Indeed, this is the method favoured by many of the world’s most famous investors. Take Warren Buffett as an example. He looks to find companies whose stock market valuations don’t reflect their intrinsic values. Adopting this approach, I reckon this FTSE legend is a bit of a bargain.
Lots of potential
JD Sports Fashion (LSE:JD.), the self-styled ‘King of Trainers’, has seen its share price fall 52% since February 2021. Problems with its key partner, Nike, concerns over the impact of tariffs, and post-pandemic-squeezed consumer incomes have all contributed.
But despite its woes, the group remains strongly cash generative. Analysts are expecting free cash flow of £384m for its current financial year ended on 31 January (FY26). This is forecast to rise to £473m (FY27) and £563m (FY28).
Plug these numbers into a discounted cash flow forecast and it quickly becomes clear that the group’s current (6 February) stock market valuation underestimates the true worth of the company.
By how much? Well, that depends on the assumptions made, including the discount rate used but — conservatively — I think a figure of around 65% can be justified.
Cheap by historical standards
And it’s a similar story comparing the group’s share price with its earnings per share (EPS). The brokers’ consensus is that EPS for FY26 will be 11.4p. This gives a price-to-earnings (P/E) ratio of just 7. Looking further ahead, the earnings multiple falls to 6.6 (FY27) and 5.9 (FY28).
It wasn’t that long ago, at the end of FY22 in fact, that it’s P/E ratio was more than twice what it is today. At the end of January 2022, its shares were changing hands for 188.05p, a figure equal to 14.6 times that year’s earnings.
| Financial year | Adjusted EPS | Share price (pence) | P/E ratio |
|---|---|---|---|
| FY22 | 12.84 | 188.05 | 14.6 |
| FY23 | 14.16 | 162.75 | 11.5 |
| FY24 | 12.81 | 117.05 | 9.1 |
| FY25 | 12.39 | 89.12 | 7.2 |
What next?
And in my opinion, I don’t think it will take much to kickstart the group’s share price. If JD Sports can prove that it’s able to grow its top line organically — rather than through buying into more stores — then I think investor confidence will be restored.
I’m sure this year’s World Cup in North America will help give a temporary boost. But to start a sustained share price rally, I think the US and UK economies in particular – the group’s two biggest markets — need to deliver per capita income growth, especially for the group’s target customer base of 18-24-year-olds.
That’s because there’s some evidence that artificial intelligence (AI) is adversely impacting the job prospects of this key demographic. If this trend continues then disposable incomes are likely to be affected. But history tells us that human beings are clever at adapting to these challenges.
My view
Despite this concern, I think the group has lots going for it. As we have seen from its cash flow potential, it retains a strong balance sheet. And its brand remains a staple of the British high street. Also, the athleisure market continues to grow and show resilience despite global macroeconomic headwinds. When combined with its attractive valuation, I think the stock’s worth considering.
In my opinion, JD Sports is just one UK share that appears undervalued. Now could be a good time to start building a portfolio of British shares to take advantage of these opportunities.
