Broker snap: JD discount too severe

10th Jun 2010 11:51

FinnCap has bumped up its profit forecasts for JD Sports after the trainers and tracksuits chain's trading update, and also raised its price target."In recognition of the extent to which JD is ahead of our H1 [first half] forecasts we have increased our LFL [like for like] sales and gross margin assumptions for Sport and Fashion," FinnCap analyst David Stoddart said.The broker now expects a 5% LFL year on year increase in the Sport division, up from its previous forecast of a 3% gain, and a 1% decline in LFL sales in the Fashion division, compared to its previous forecast of a 3.5% decline.Forecasts for the second half of the current year have been left unchanged as the broker is waiting on this month's Budget to see which way the wind is blowing for retailers. FinnCap has also increased its 2011 pre-tax profit forecast from £70.6m to £74.6m and its earnings per share estimate from 101.6p to 107.4p after the company this week cemented its reputation for outperforming market expectations. The shares are rated a "buy" and the price target has been cranked up to 1075p from 1020p. Stoddart believes the size of the stock's discount to its peers is undeserved, although he acknowledges that as the shares are tightly owned the limited liquidity is going to weigh on the shares."Arguably a discount is warranted on the new, as yet unproven, businesses JD has acquired. However, none of these points is sufficient, in our book, to justify the valuation gaps to sector peers, especially in the light of the latest example of JD's tendency to outperform expectations," Stoddart concludes.