Why I like this mid-cap stock over Sports Direct International plc for the long term
It's a funny old game. That was the catch phrase of former England footballer and broadcaster Jimmy Greaves, often used to describe strange or sometimes even unfair results on the pitch. Over the years I've found myself using the same phrase when company results or announcements and their corresponding share prices have diverged.
For instance, only last month Sports Direct International(LSE: SPD) revealed that for fiscal 2017 the group suffered a near 60% fall in underlying profit before tax, even though group revenue had climbed 11.7% to £3.25bn. Underlying earnings came out even worse, plunging 67.9% to just 11.4p per share from 35.5p the previous financial year.
Strangely enough, the news sparked a frenzy of buying activity with the share price rising 14% to 344p, before settling at 335.1p, its highest level in almost a year. Like I said, it's a funny old game! Management attributed the decline in financial performance to the negative impact of the weaker pound since the EU referendum, as well as strategic challenges in its operations in continental Europe. So why has the market reacted so positively to such a weak performance?
The Selfridges of sport
Well, believe it or not, the full-year results were actually better than the market was expecting. Additionally, the group's Chief Executive Mike Ashley claimed that Sports Direct was on course to become the 'Selfridges' of sport by migrating to a new generation of stores to showcase the very best products from its third party brand partners. The company also revealed it was aiming to achieve growth in underlying earnings of 5%-15% in full-year 2018. The optimistic outlook was welcomed by the market.
But I'm not convinced. The weak pound is increasing costs, and consumers are facing rising inflation and weak wage growth, all of which does not bode well for a retailer whose clientele still mainly comprises price-sensitive shoppers. Frankly, I see the recent share price rally and high earnings multiple of 26 as a good time to sell.
Convenience is king
Meanwhile, one UK retailer with prospects I'm a lot more bullish about is B&M European Value Retail(LSE: BME). The group behind the popular B&M Bargains and B&M Home Stores last week announced the acquisition of Heron Food Group Limited, a discount convenience retailer operating predominantly in the North of England with 251 stores.
The FTSE 250-listed business is already the UK's leading multi-price value retailer with 543 B&M branded stores, as well as 79 Jawoll branded stores in Germany. The £152m acquisition of Heron will enable B&M to develop and roll out a complementary, proven and profitable discount convenience grocery brand. The customer profiles of Heron and B&M are similar and both formats are expanding successfully.
B&M's shares have performed well since I last recommended them in February, gaining 22%, but I think shareholders would be wise to sit tight and hold on for further gains. Furthermore, with earnings forecast to rise by more than a third over the next couple of years, new investors shouldn't be deterred by the premium P/E rating of 21.5, as this could be a price well worth paying for continued long-term growth.
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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.