Image source: Britvic (copyright Evan Doherty)
Looking at the stock price of JD Sports Fashion (LSE:JD) over the last five years has moved in the right direction, but not dramatically. In that period, shares rose 22%.
But if I had bought the shares five years ago and sold them in November 2021, I would have seen my stake increase in more than 130% in value.
Since then, the share price has almost halved.
So if I buy now, could I expect the price to double again in the next five years? After all, that would only require the stock to reach the same price it reached in 2021.
Proven business model
Yes, I think the actions could double in the next five years.
I have added more to my portfolio in the last few months precisely because I felt that the share price looks attractive.
JD has a simple but proven model: a retail establishment spanning physical stores and a large online presence, in markets from Europe to Australia and the United States.
That has been the lever for explosive growth. Income has increased.
Source: TradingView
I hope that continues. The company plans to open hundreds of new stores annually. Last year alone it opened more than 200.
This expansion has added economies of scale and helped deepen the brand's appeal, customer base and operational experience. I think those are all competitive advantages.
Not only has revenue skyrocketed, but so has operating income.
Source: TradingView
Prospects for future success
But companies can face many non-operating costs, especially if they want to spend money on significant expansion.
That helps explain why, despite operating income of around £1bn a year, JD Sports' earnings per share are quite small, less than 3p.
Source: TradingView
This suggests that the company is trading on a price-to-earnings ratio of around 45. That doesn't sound cheap at all.
But given that the company is selling for around £6.4bn in total, while maintaining over £1bn in net cash, I think the valuation is really attractive.
After all, the company seems to have good growth prospects.
Optimistic business statement
This was stated today (March 28) following the publication of a trade statement covering last year.
In January, JD Sports' share price plummeted after a profit warning. It reduced expected pre-tax profit and adjusted items from last year to between £915m and £935m. The company said today that it has met those expectations.
For the current year, before any accounting adjustments, it expects a pre-tax profit of between £900m and £980m. Seven weeks into its current financial year and trading has been in line with expectations, according to the update.
The sportswear market has been hugely competitive, resulting in huge discounts. That remains a risk to profit margins for retailers, including JD Sports.
But in a difficult market, it stands firm and expands.
I expect the company to significantly grow its sales and view its price relative to pre-tax earnings as a bargain.
Could we see JD Sports' old share price equalize over the next few years, meaning the stock will double from today? Possibly, if earnings per share also grow strongly enough from where they are. The company could achieve this by reducing non-operating costs, substantially increasing revenue, or both. I see them as possibilities for the coming years, but there is still a lot of work to do.
