Is this the biggest bargain in the FTSE 100 right now?

After falling 17% so far this year, JD Sports Fashion (LSE:JD) shares are close to their lowest level in the past decade. The FTSE 100 sportswear retailer has been dealing with problems for some time, but the slide in recent months is starting to look overdone to me. Could it be the biggest bargain in the index?

The recent fall

I note two triggers for the move lower this year. One has been some prominent analyst price downgrades, and the other was cautious guidance from management. Back in February, the research team at Deutsche Bank cut their target price for JD Sports from 95p to 85p. They flagged concerns that JD may be out of step with shifting fashion trends, particularly as consumers rotate away from some of its core styles.

At the same time, Q4 results released in January showed UK and Europe sales fell by 5.3% and 3.4%, respectively. Management warned of “muted market growth” ahead, with profits expected to dip year on year. It’s true that strained consumer finances are causing some to spend less. Furthermore, the business is also heavily exposed to big brands like Nike, and when those suppliers have their own problems (which Nike has) JD feels it too. Its share price is down 11% in the last year.

A positive outlook

Despite all the noise, the underlying business is still growing. North America Q4 revenue rose by 5.3% versus the same period last year. Asia Pacific grew by 9.6%! JD maintains a strong global footprint with thousands of stores worldwide. This means it’s diversified, helping right now even when some regions are underperforming.

It’s also well-positioned to capitalise on the growing athleisure retail trend. Add into the mix the increase in running as a hobby, with the latest results noting “positive momentum in running” sales.

Crucially, when it comes to calling the stock a bargain, I have to refer to the valuation. It has compressed dramatically, with the price-to-earnings ratio at just 5.69. I use 10 as a fair benchmark, so anything below that I’d classify as undervalued. The low ratio suggests investors are factoring in a lot of bad news already for the year ahead. If things don’t turn out as gloomy as some predict, the stock right now looks like a bargain given how much it could rally.

The bottom line

If JD can stabilise profit margins, adapt to changing trends (like the shift towards running brands), and continue to see strong growth in North America, there’s a strong case for the share price to move higher. There’s also an argument that short-term investors have been overly pessimistic, focusing on quarterly wobbles rather than long-term growth potential. Of course, risks relating to underperformance in the UK and Europe remain, but on balance, I believe the stock is the biggest bargain in the FTSE 100 right now and am thinking about buying it myself.

The post Is this the biggest bargain in the FTSE 100 right now? appeared first on The Motley Fool UK.

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Jon Smith has no position in any of the shares mentioned. 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.

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