With a share price just north of 200p, sportswear retailer JD Sports Fashion (LSE: JD) is among the 10 lowest priced FTSE 100 index constituents today. And its share price has fallen further in the past couple of sessions. I have to admit I am a bit taken aback by that fact. Its fall comes despite the FTSE 100 index remaining strong — the Footsie actually closed above 7,500 earlier this week after a really long period below that level. I am also surprised because JD Sports Fashion’s own trading update also released during the week was pretty decent.
Below are some of its highlights:
#1. For the 22 weeks up to 1 January 2022, the company’s performance was ahead by 10% compared to the same time last year.
#2. It expects profit before tax for the full-year ending 29 January 2022 to be “at least” £875m. Let me put this in perspective. This is 8% higher than the current market expectations of £810m. It is even higher than the full-year expectations laid out in its interim results by around 17%. At the time, the company had expected pre-tax profits of at least £750m.
#3. For the fiscal 2023, it expects that pre-tax profits will be in line with its profits this year, which is also ahead of market expectations.
Why is the FTSE 100 stock down?
So why is the stock down? I think it is possible that investors were let down by the expectations for next year. Also, in relation to this year’s results, the company mentioned that the fiscal stimulus in the US might have contributed as much at £100m to the expected profits. If this is indeed the case, then its pre-tax profits without this support would have been closer to the initial estimate of £750m. Also, this reduces the possibility that it could revise its profit expectations for 2023 upwards. The stimulus was a one-off event during the pandemic, after all.
And in terms of valuations, it is still somewhat steep. At 26 times, its P/E ratio is already higher than that for the FTSE 100 index as a whole at 18 times. To be fair, JD Sports Fashion has proven itself to be a far superior performer than many other constituent stocks, so to that extent, a higher P/E could be justified. At the same time, it would be able to sustain its valuation only if it continues to perform.
What I’d do
I have little reason to believe it might not be able to do perform over the medium-to-long term. Economic recovery would hopefully continue to drive consumer spending in the foreseeable future. And the company has also made a slew of acquisitions recently that could impact its numbers positively over time. Further, the athleisure market is a growing one, which could continue to drive the stock forward. I bought it a while ago, and increased my holdings recently. If I had not, I would do so now and hold it for a long time.
The post This FTSE 100 stock just raised its profit forecast! What’s next for it? appeared first on The Motley Fool UK.
Manika Premsingh owns JD Sports Fashion. The Motley Fool UK has no position in any of the shares mentioned. 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.
Motley Fool UK 2022