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Despite the FTSE 100 rallying more than 13% since its April lows, many of its constituents are still trading at prices firmly below where they were 12 months ago.
A prime example is JD Sports Fashion (LSE:JD.). The sports clothing/footwear retailer has enjoyed a bit of rally in recent weeks. But over the last 12 months, the stock’s still down by more than 25%. Yet, if the analyst team at Peel Hunt is correct, shareholders could soon see their investment grow significantly. In fact, the research & analysis firm currently has a 200p price target on the business, 120% higher than where the stock’s trading today.
So what’s behind this bullish forecast?
Investigating the 200p price target
Peel Hunt’s strong conviction is driven by a variety of factors. However, the three main catalysts are:
- Brand strength driven by a strong relationship with Nike that paves the way for exclusive product offerings.
- Disciplined decision-making ensuring the balance sheet stays in good shape even during weak trading periods.
- A long-term-focused strategy executed by management focusing on operational efficiency and sustainable international expansion.
If everything goes according to plan, capital expenditures are expected to drop from 5% of revenue to as low as 3%. At the same time, the group’s market share in regions like North America and Europe is set to expand significantly over the next five years, paving the way for a return to high sales growth.
Given the challenges the company has encountered lately, is this likely to happen? Management certainly seems to have confidence. In fact in April, the group launched a £100m share buyback programme. And over the last 12 months, the CEO and non-executive directors have been buying shares for their own portfolio, collectively totalling around £273,000.
Taking a step back
The prospect of a potential 200p surge in share price is understandably exciting. But it’s important to note that Peel Hunt currently has the most optimistic outlook for this business. Other institutional investors who see similar positive traits aren’t as bullish with their share price targets.
For example, Shore Capital believes the FTSE 100 stock will only climb to 128p, while Barclays is actually anticipating the stock could fall to as low as 80p by this time next year.
Digging deeper, there seems to be growing concern over the firm’s reliance on its relationship with Nike. The giant sports brand accounts for almost half of JD’s sales. And right now, the US company’s undergoing a bit of a restructuring after a series of strategic missteps that caused sales to stumble.
Weak performance from Nike directly impacts JD’s business, especially if it translates into product availability disruptions.
All things considered, does a 200p share price target seem overly optimistic? In my opinion, yes. With other external factors like US tariffs plaguing performance, expecting the JD Sports share price to more than double in the next 12 months seems like a big ask.
Having said that, with the shares trading at a forward price-to-earnings ratio of just 7.7, I think investors are being overly pessimistic about this business. So perhaps it’s a stock worthy of closer inspection.
