On Tuesday, Barclays upgraded its rating on JD Sports Fashion plc (LON:JD:LN) (OTC: JDDSF) shares from Underweight to Equalweight, while reducing the price target to £0.80 from £1.10. The adjustment by Barclays analyst Richard Taylor reflects a shift in the evaluation of the company’s risk versus reward balance.
Taylor’s previous Underweight rating was influenced by several factors, including JD Sports’ significant revenue reliance on Nike (NYSE:NKE), where brand momentum has been flagging. Concerns about the company’s financial controls and communication, as well as its poor free cash flow (FCF) conversion, where net income was approximately 45% of FCF in the FY25E, were also contributing factors. These issues rendered price-to-earnings (PE) ratios less effective as a valuation metric. Additionally, the company’s incentive schemes were primarily focused on earnings per share (EPS) growth without considering return on invested capital (ROIC).
The analyst noted that while new risks associated with tariffs and a potential recession are emerging, many of the stock-specific concerns have been either addressed or are now partly reflected in the stock’s valuation. This change in circumstances has led to the upgrade in the stock’s rating.
Barclays now sees the risk versus reward profile for JD Sports as more balanced, resulting in the Equalweight rating. The new price target of £0.80 is based on a forward year 2026 PE multiple of 7.5 times and a FCF yield of 7.5%, which is anticipated to increase to 11% in FY27.
JD Sports Fashion plc has faced scrutiny over its financial strategies and controls, but the company has made efforts to address these issues. Barclays’ rating upgrade suggests that the firm believes JD Sports has made progress in mitigating some of the concerns that previously weighed on its stock performance. The reduced price target, however, indicates that there are still challenges ahead that may affect the company’s valuation.
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