Why fast-growing JD Sports could be worth a third more

Having stepped up the profits pace from £100 million in 2015 to more than £300 million three years later, JD Sports Fashion showed again today why it remains the high street retailer to beat.

Its impressive 26% rise in headline profits to £307 million for the year to February 3 resulted in a 5% rise for shares as well as further acclaim in the City.

Broker Peel Hunt said the combination of 3% growth in like-for-like store sales and a 30% jump in online sales represented a "stand-out effort" by the company at a tough time for the industry and the consumer.

Analyst Jonathan Pritchard added: "It is clear that the JD offer is exactly what the customers want, be that physically or online."

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Shares have risen more than 220% since JD broke that £100 million profits barrier in 2015. However, this masks a more uncertain trend in recent months as investors have worried about the consumer outlook, as well as specific threats such as Amazon selling Nike branded products.

Now there are jitters about JD's plans for a substantial US presence after its recent transformational deal to acquire Finish Line for just under £400 million.

The share price uncertainty has dealt a blow to the interactive investor Aggressive Winter Portfolio, which counts on JD as one of its key members following growth averaging 29% over the previous 10 winters.

Source: interactive investor          Past performance is not a guide to future performance

Today's price rise at least means JD shares are back in positive territory with two weeks still to go for the Winter Portfolio.

Peel Hunt's Pritchard's believes that a record 500p is achievable for the shares, based on the current momentum and the fact that the FTSE 250 stock is trading on an early teens PE multiple.

He said: "These are revolutionary times in the industry and it is hard to find a sports retailer playing its cards as well as JD. The shares are a must have for the short and long term."

With a target price of 495p, Investec Securities agrees that the valuation multiple of 13.1x 2018 earnings looks undemanding and does not reflect the strength of its brand relationships or unique market niche.

They added: "JD Sports is an attractive international roll-out story, in our view, capable of delivering sustainable double-digit earnings growth."

Investec thinks that the focus of the current financial year will be on business integration and infrastructure investment after several years of strong growth.

Shore Capital is more cautious in its valuation of JD, with a price target of 353p.

JD, which has more than 1,200 stores, has benefited from the athleisure trend of fashion-driven sportswear, as well as opportunities for growth through international expansion and the now profitable Blacks-to-Millets outdoor business.

Analysts also point to the strength of its relationships with key suppliers such as Nike and adidas, something which will be important as it attempts to complete the takeover of Finish Line in the United States.

That deal, which is subject to shareholder approval on both sides, will add 931 branded stores and concessions, including those in Macy's department stores.

JD's strong record of cash generation means it is well placed to fund such expansion opportunities, even if this is at the expense of dividend growth. The total pay-out increased 5.2% to 1.63p today, giving a yield of 0.5%.