UK Markets open in 3 hrs 57 mins

Why I’d run a mile from the Sports Direct share price right now

Alan Oscroft
Close-up Of Wooden Blocks With Risk Word In Front Of Businessperson's Hand Holding Magnifying Glass

Sports Direct International (LSE: SPD) is facing a tough legal deadline. Wednesday’s its AGM, and the law says it has to have an auditor in place by then. If the firm can’t find a willing taker within seven days, it will become the first major UK-listed business to fail to appoint an auditor and be forced to accept one chosen by the government.

The company was put into this embarrassing situation when its previous auditor, Grant Thornton, quit after 10 years with the company. Since then, Sports Direct has had no success in finding a replacement, despite efforts to attract the big auditors in the City.

Results delay

The problem stems from much-delayed results in July, which revealed an unexpected tax bill of £624m owed to authorities in Belgium, and it’s had a significant effect on the Sports Direct share price. Despite picking up since the beginning of August, the shares are still down 21% over the past 12 months, and have now fallen 60% over the past five years.

With investors starting to regain interest, is Sports Direct a recovery stock we should be buying? Well, on fundamentals, we’re looking at a P/E of around 14 but with no dividends, after a horrible five years for earnings. I don’t find that attractive at all, even without considering how reliable the current outlook is likely to be anyway.

But then, I’d steer well clear of any company in this kind of mess, whatever the valuation metrics say.

Better recovery?

After its relegation from the FTSE 100, I think it’s time to re-examine Marks & Spencer (LSE: MKS) and ask is it a good recovery target yet?

After a 12-month share price fall of 30%, since mid-August we’ve seen an 11% uptick, so it seems others are having the same thoughts. And I can’t help wondering if time in the FTSE 250 might take the high street chain out of the spotlight a little and give it some room to breathe.

One approach I don’t think M&S can really take is to just carry on with business as usual. It’s been doing that for years, hoping every season that it’ll get its clothing offer just right and see them flying off the shelves — but it just hasn’t been happening.

Direction

The firm’s recent tie-up with Ocado is, I think, a move in a good direction. M&S is renowned for its food, and its Simply Food stores are popping up all over the place — including locations with high levels of passing trade, such as railway stations.

But a few things make me think it’s still too early to buy. The main reason is I don’t like investing in a company when it’s in a transition phase and I can’t really see where it will end up. The firm’s financials are up in the air too, especially after it paid a high price for its stake in Ocado — and Ocado isn’t expected to produce any profits over the next couple of years at least.

P/E values of around 10 might look cheap, but when I don’t know what I’d actually be buying, I’m still not tempted.

More reading

Alan Oscroft has no position in any of the shares mentioned. 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 2019