Value Investing

Searching For The Pearls – JD Sports Fashion PLC (JD)

Searching For The Pearls – JD Sports Fashion PLC (JD) by Bargain Value

Today, we will continue our searches for “pearls” on the LSE. We have found the company called JD Sports Fashion, so let’s take a closer look at its financial indicators.

This company is listed on FTSE 250 index and operates in sports-fashion business. As we can see on a chart below, the company has got strong and growing annual revenues.

JD Sports Fashion

Revenues increased from £434,16 mln 2004 to £1 610,7 mln in 2015. It gives us an average pace of £106 mln each year. They are easy to predict and we can expect, that the company’s turnover will continue to grow.

On the other hand, when we look at the net profit, the situation is not so good.

JD Sports Fashion

Annual net profit was rising from 2004 to the middle of 2011. Then, was falling  from Q4 2011 to Q2 2012. After that, the growth was not very quick.  2011 was not a good year to all retail sector. The biggest fall in sales for 16 years was recorded in that year and the prices of components raised. However, revenues were not the problem of JD Sports Fashion. Decline of this indicator is related to the £10 mln loss in Blacks business and phasing the earnings streams from new acquisitions in 2012. Moreover, the company had got bigger, negative financial and investing cash flows in Q4 2011 (second chart below) and leased a new warehouse (£3,9 mln was incurred in that year). In 2013 occurred £14,9 mln of operating losses. Net profit came back on the growing track in Q2 2014 and now it is on the level of £74,36 mln (after 41% increase yty).

When we look at profitability indicators, we can observe the same declines as on the chart above.

JD Sports Fashion

The company’s profitability is growing. They had a little fall in 2009 and in the period between 2011 and 2014 but the management can be satisfied again, because all indicators are moving toward their highest, 10 years values (now: ROA=13,43%, ROE=30,88%, ROCE=34,07%). We do not see the reason, why the company can’t go back to the levels from 2007 and 2009. The indicators for retail sector are much lower (ROA=13,06%, ROA=13,43%), so JD Sports Fashion uses their capital and assets very effectively and better than competitors.

Take a look on the cash flows, which are better indicators of a true company’s situations:

JD Sports Fashion

The operating cash flows are always positive, so JD earns on their products and services. It is a crucial feature of each “pearl”. The company have been investing very aggressively and still is. Higher investments in the last period are correlated with bigger, positive operating cash flows, which means that company uses capital wisely. Larger negative investing cash flow in the second half of 2013 and first half of 2014, was backed up with larger, both short and long-term liabilities with emphasis on the first one. What is important, this kind of cash flow is the smallest one, which is very good.

On the other hand, total debt adds up to 58,48%, which is a little bit too much in our opinion.

JD Sports Fashion

Fortunately, the current ratio, which measures short-term liabilities covering with current assets is 1,17. It could be higher, but this level is good enough and the company has not got a problem with liquidity. It is a very good information for creditors. What’s more, we can see that value of this indicator is quite stable in last period (2012-2015).

JD Sports Fashion

What about us, the investors? Does the company share profits with stockholders? The table with annual dividends is presented below.

JD Sports Fashion

The dividend per share was rising from 2004 to 2013, same as the price of company’s shares. JD did not lower dividend even in weaker years (2012-2013). It is very good sign, because it means that the company care about shareholders well-being, even when some money is lost (2013). Actually, the dividend per share was the highest that year. In the present year the yield will be lower, due to skyrocketing price of shares. Moreover, there was a 4:1 split in 2014 in JD. stocks, so dividends amount before 30 June 2014 are 4 times higher in the table. To compare data between years, we should just divide “per share” amount by 4 for year 2014 and earlier. If the price will not go any higher we can expect around 1,1% dividend yield.

Chart shows JD. stock price for last couple of years.

JD Sports Fashion

In the last year price went up rapidly over 90%. This growth was justified by very good net profit in the first two quarters of 2015. If the next reports will be equally good, there is a great chance, that climbing will continue.

We know, that this company creates positive cash flows, the revenues and stock price are rising. Now, we must determine, if it is a good moment to invest. In other words, if JD. is cheap enough to buy it. Let’s check the P/E ratio.

JD Sports Fashion

P/E value of 20,39 is between an average of General Retailers Sector (19,98) and FTSE All Shares (21,25), so the price is not overestimated. For the long time this ratio was in the channel from 6 to 10. It has started to rise in 2013 and stopped around 20. Taking into consideration the fact, that revenues are high and rising steadily, the price is fair and it is not too risky to invest in the moment. Of course, after such intense rise of price in 2015, it will be wise to wait and see if there will not occur any correction. On the other hand, if the average growth (27%) of net profit from the last 3 years will hold, we can expect £153,7 mln in the next period. In this situation, when the price won’t rise very much, the P/E will go back to the level of 7.

Summary:

JD Sports Fashion is great company with steadily rising revenues. It has good profitability and cash flows. It is not too expensive, because of good earnings expectations. The valuation of the company is justified and backed by healthy level of all kind financial indicators. Momentum is great, but it can be wise to wait for the possible correction.