Christmas Comes Early for Mike Ashley

The Week: Sports Direct founder is celebrating a strong end to the year for his retail empire, but Morningstar columnist Rodney Hobson thinks the 30% share price price is overdone

Rodney Hobson 20 December, 2019 | 11:32AM

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What a reversal of fortunes there has been in the sporting world. Sports Direct - now amusingly renamed Frasers (FRAS) to mark the impending closure of many of the House of Fraser stores - has had more than its shares of bad publicity in recent years on issues such as chief executive Mike Ashley treating it as his personal fiefdom, maltreatment of warehouse staff and poor customer service in its retail outlets.

Direct Hit

But Christmas has come early for Ashley, and not just because Newcastle United has had a better set of football results. Figures for the 26 weeks to October 27 were truly remarkable.

Group revenue relied on acquisitions for a 14% rise, otherwise like-for-like figures were actually lower. Yet underlying profits soared 58%, underlying earnings per share more than doubled and strong cash generation, helped by proceeds from the sale of the Shirebrook distribution centre, almost chopped net debt in half. With UK and European retailing plus wholesaling and licensing all well ahead, the only black spot was the rest of the world.

I don’t like to play Scrooge but I did feel that the 31% leap in Sports Direct shares on the day of the results was a bit too overenthusiastic, especially as there is no dividend. Share buybacks are no substitute. Still, I don’t begrudge shareholders their festive joy after a rise from 214p only four months ago to around 470p.

Shareholders in deadly rival JD Sports (JD.) have admittedly done better overall in 2019, with the shares leaping from 350p to touch 800p this month. The upward rise has been more steady, too. I would still prefer to be in JD Sports than Sports Direct but the latter is no longer an obvious one to avoid. Good luck to Sports Direct (sorry, Frasers) shareholders: you deserve a merry Christmas.

Selling Greyhounds

As the sale of the iconic Greyhound coaches proceeds at tortoise pace, new chairman David Martin has wasted little time in deciding that the bus and train company FirstGroup (FGP) should look to end its long journey into North America. The contract bus services over there, which includes 43,000 yellow school buses, is up for sale. Martin doesn’t put it quite so bluntly, saying only that advisors have been appointed “to formally explore all options” across the Atlantic but disposal is stated as one option and shareholders should assume that is what will happen provided a buyer or buyers can be found.

FirstGroup shares rose 6% on the news. I agree it’s good news that the company will focus on its UK operations; I’m not convinced that it is worth chasing the shares any higher at this stage.

Pearson Brought to Book

More change at education specialist Pearson (PSON), the former broadly based publisher where nothing quite seems to work. The latest wheeze is to sell the remaining 25% stake in Penguin Random House, which makes sense as the book publisher no longer fits into Pearson’s portfolio and holding a minority stake was never going to work well.

Alas, although Pearson got more than $1 billion for a tranche of 22% two years ago, it got only $675 million for 25% this week.

Chief executive John Fallon is to step down next year after seven years in charge. He hasn’t been a disaster by any means but he hasn’t been an unqualified success either. I have never felt during his tenure that Pearson knew quite where it was going. The shares rose 1.7% on the day of the announcements but slumped 5.7% the following day. Not one to invest in yet.

Expect an Eventful 2020

As usual at the end of the year, this column is taking a break, but not before wishing all readers a happy Christmas and a prosperous New Year. I recommend that we all take time off from the stock market and enjoy ourselves so we come back refreshed and raring to go. Next year will be just as eventful.

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
FirstGroup PLC126.00 GBX0.48
Frasers Group PLC509.50 GBX0.00
JD Sports Fashion PLC849.20 GBX1.31
Pearson PLC583.80 GBX0.38

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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