Insider: director backs FTSE 100 stock’s revival

Ahead of half-year results, one director at this blue-chip firm thinks the shares are worth owning at such low prices. Elsewhere, a small-cap recovery is tipped to continue.

15th July 2024 07:54

by Graeme Evans from interactive investor

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Hopes that a summer of sport will help to kickstart the FTSE 100 revival of JD Sports Fashion (LSE:JD.) last week got £45,000 of boardroom backing.

The dealings involving the wife of non-executive director Darren Shapland, who has 35 years of experience in retail and consumer businesses, took place with the transatlantic retailer still trading close to a two-year low at 112p.

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This support follows a tough 2024 for the 3,300-store retailer as it grapples with high levels of promotional activity, unhelpful weather and a lacklustre period for product innovation.

Disappointing Christmas trading meant an 8% decline in annual profits to £912.4 million in the year to 27 January, while a first-quarter update showed UK like-for-like sales down by 6.4%.

A poor trading statement by key supplier Nike recently added to the pressure as shares posted a 28% half-year decline as the third worst performing stock in the current FTSE 100 line-up.

The weakness has come despite City hopes for a turnaround fuelled by softer comparatives, growth in the UK economy and a busy sporting calendar that has included Euro 2024 and continues with the Olympics later this month.

Athleisure trends and the group’s North American presence mean major football tournaments are much less significant for the company than they were a few years ago.

But JD’s England replica kits are likely to have sold well, while ahead of yesterday’s final the company had a foot in the other camp through Spain-based sports retailer Sprinter.

The Bury-based group is due to publish half-year results in August (last year it was late September), having reported organic sales growth of 4.9% in the first quarter to 4 May as stronger trading in North America and Europe offset the weaker performance in the UK.

Management guidance issued at the end of May reiterated hopes for annual sales growth of between 6% and 9% and adjusted profits in the range of £955 million to £1.03 billion.

Bank of America analysts expect a sequential improvement in sales throughout the year, adding that JD’s balance sheet firepower was among other reasons for a ‘buy’ recommendation.

They have a 150p target price, noting last month that a 45% valuation discount to JD’s historical average looked to be an attractive entry point.

UBS recently pointed to an encouraging medium-term growth outlook for its 178p estimate, while Peel Hunt said after annual results that there looked to be “masses of value” in the shares.

The broker, which has a price target of 250p, said the valuation continues “to reflect bad rather than good news ahead”.

It added: “At the heart of the weaker industry performance in recent months has been the lack of innovation from the big sports brands. Of course, JD has good visibility on what is in the pipeline, and there is an improvement in newness ahead.”

In contrast, Deutsche Bank warned last week that the balance of risk is still weighted to the downside. The bank expects the pressure on JD’s UK earnings to continue, which in turn increases the onus on international performance.

Its analysts named JD alongside Primark owner Associated British Foods (LSE:ABF) and Boohoo Group (LSE:BOO) as their least preferred UK retail stocks. Their preferences included Currys (LSE:CURY), Marks & Spencer Group (LSE:MKS) and B&Q owner Kingfisher (LSE:KGF).

A safe investment?

Avon Protection (LSE:AVON) shares have been backed to continue their strong run after one of its non-executive directors declared an investment worth £20,000.

Maggie Brereton made her purchase on Tuesday at a price of 1,278p, which compares with 835p at the start of the year and about 600p last autumn.

Avon, whose head protection and respiratory products are used by militaries and first responders, had been close to 1,400p in May after interim results revealed further progress in the turnaround programme led by chief executive Jos Sclater.

He reported a record order book worth $199 million (£153 million), boosted by significant strategic contract wins that included one worth up to £38 million with the Ministry of Defence. Adjusted profits rose 66% to $8.8 million (£6.8 million) in the half-year period.

Peel Hunt said: “The strong results, coupled with the impressive operational improvements, increase our confidence in the company delivering medium-term targets.”

The share price is still a far cry from over 4,000p in November 2020 when the company was known as Avon Rubber and a hugely popular stock for retail investors.

A product testing failure that would ultimately lead to the winding down of Avon’s body armour business triggered the selling pressure in 2021.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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