Bloomberg
As Finish Line, the U.S. athletic shoe chain, becomes British, buying shares in its expansion-minded acquirer looks like a slam dunk.
Bulls on JD Sports Fashion JD., -1.10% praise its $558 million purchase of Finish Line FINL, -0.22% announced last month. “Not every shareholder will be thrilled about the notion of taking on the U.S., but it is a key move in JD’s desire to be a global player, and on a decent multiple for such a large footprint, it strikes us as eminently sensible,” say analysts at brokerage Peel Hunt in a recent note. They emphasize that the British retailer is a cash buyer paying just 0.3 times Finish Line’s 2017 sales of $1.8 billion for the U.S. company’s more than 900 locations.
JD has shown it can enter new markets successfully with moves into Europe, Australia, and Malaysia, add Peel Hunt’s Jonathan Pritchard and John Stevenson. And the stock doesn’t look too pricey. The shares, recently around 342 pence ($4.79) and part of London’s mid-cap FTSE 250 index MCX, -0.23% , trade around a 13 times forward-year price/earnings multiple, below rival Sports Direct International’s SPD, +1.12% P/E of 17.
JD’s stock “offers excellent value,” and investors score a “fast-growing, ambitious company with a top-quality format and transferable skills,” say Pritchard and Stevenson. They put a Buy rating on JD shares, along with a price target of 500 pence. That implies a rally of about 50% from where the stock has traded lately, after selling off following the deal announcement.
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JD, which currently generates about 70% of its $3.3 billion in annual revenue from Britain, could rejuvenate Finish Line in part through its solid relationships with the big makers of athletic gear, the Peel Hunt pair say. They stress that JD scored a shoutout on Nike’s NKE, -2.93% earnings conference call in mid-March. The sneaker giant’s CFO, Andrew Campion, described the retailer as a key strategic partner that is “relentlessly consumer-focused and digitally connected.” A savvy recent ad campaign with Adidas ADS, -0.34% ADDYY, -0.27% featured British rapper Stormzy.
“JD usually receives a strong allocation of the most sought-after product, and this has been very helpful when it has arrived in new territories,” Pritchard and Stevenson say. Finish Line is “not at the top of the list for allocations,” and that has been a problem for the struggling Indianapolis-based retailer, especially as manufacturers increasingly sell directly to shoe lovers, they add.
Wall Street was surprised by JD’s buyout of Finish Line, given that Sports Direct had been building a stake in the U.S. retailer. But it might be better this way, say Susquehanna analysts led by Sam Poser. “We believe a JD deal makes sense.” JD lines up more closely with Finish Line’s aim of being a “full-priced retailer carrying marquee product,” while Sport Direct could have ushered in more discounting, they say in a note.
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Many strategists are currently knocking broad bets on U.K. stocks, with a March survey by Bank of America Merrill Lynch finding 42% of global fund managers underweight the Brexit-bound country—an all-time high. BlackRock’s global chief investment strategist, Richard Turnill, says in a recent note that the U.K. equity market looks likely to keep underperforming, even though the nation’s recent transition deal with the European Union removes some uncertainty around its push to exit in less than a year. JD could be a bright spot in the market, as it heads west.
This report also appears at Barrons.com.