Down 52% with a P/E of 7. This value share might not be on offer for much longer
Successfully sniffing out value shares is the key to profitable investing. Indeed, this is the method favoured by many of the worldâs most famous investors. Take Warren Buffett as an example. He looks to find companies whose stock market valuations donât 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 âKing of Trainersâ, 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 groupâs 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 itâs a similar story comparing the groupâs share price with its earnings per share (EPS). The brokersâ 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 wasnât that long ago, at the end of FY22 in fact, that itâs 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 yearâs 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 donât think it will take much to kickstart the groupâs share price. If JD Sports can prove that itâs able to grow its top line organically — rather than through buying into more stores — then I think investor confidence will be restored.
Iâm sure this yearâs 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 â the groupâs two biggest markets — need to deliver per capita income growth, especially for the groupâs target customer base of 18-24-year-olds.
Thatâs because thereâs 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 stockâs 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.
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James Beard has positions in JD Sports Fashion. The Motley Fool UK has recommended Nike. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
