Interactive Investor

JD Sports rides upgrade cycle

31st July 2015 10:49

Lee Wild from interactive investor

Like England cricket exile Kevin Pietersen, high street sports fashion chain JD Sports loves talking about itself. It announced record full-year results mid-April, then flagged a strong start to the new year just last month. Now, in an unscheduled update, the high-flying firm says full-year profit will be 10% higher of forecast.

Ahead of first-half results on 16 September, the tracksuits and trainers seller says like-for-like sales remain better than forecast, and we already know that the weak euro will take some of the shine off rising European sales - JD buys in sterling and sells in the single currency.

"Subject to the continuation of a positive performance, we now anticipate that the headline profit before tax for the current year will be approximately 10% ahead of the current consensus market expectations of around £110 million," said the firm Friday.

That's forced a round of earnings upgrades. Investec Securities now pencils in profit of £120 million for the 12 months ending 31 January 2016, giving earnings per share 47.5p. They go up for the following year from 46.5p to 50.8p then to 54p for January 2018. The broker suspects that cooler weather year-on-year was more helpful for the outdoor business, so continues to factor in a £0.8 million loss there.

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We've backed JD since last September's record interims when the share price was 433p, and in April we liked the growth potential and noted that the shares were not expensive. Now, the shares are up another 9% at 811p.

At that price, JD shares trade on 17 times forward earnings. That's no longer cheap, and after such a significant rally one might expect some profit taking, or at least some period of consolidation as the shares are temporarily overbought, according to the relative strength index (RSI). At least 715p looks to be very solid support.

That said, Investec believes there's upside to 900p.

"Valuation not reflective of European opportunity with a focussed, profitable JD business that is capable of being rolled out and management confidence reflected through increased openings in recent years," says analyst Kate Calvert. Even that price target represents a 10% sector enterprise value/cash profit (EV/EBITDA) discount due to lower margin structure.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.