Key Insights

The projected fair value for JD Sports Fashion is UK£1.20 based on 2 Stage Free Cash Flow to Equity Current share price of UK£0.86 suggests JD Sports Fashion is potentially 28% undervalued Analyst price target for JD. is UK£1.14 which is 4.4% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of JD Sports Fashion Plc (LON:JD.) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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The Method

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (£, Millions)  UK£538.4m UK£617.2m UK£753.2m UK£817.0m UK£680.0m UK£605.0m UK£562.9m UK£539.7m UK£528.3m UK£524.5m Growth Rate Estimate Source Analyst x7 Analyst x6 Analyst x5 Analyst x2 Analyst x1 Est @ -11.03% Est @ -6.96% Est @ -4.11% Est @ -2.12% Est @ -0.72% Present Value (£, Millions) Discounted @ 11%  UK£486 UK£503 UK£554 UK£542 UK£407 UK£327 UK£275 UK£238 UK£210 UK£188

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£3.7b

Story Continues

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 11%.

Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = UK£525m× (1 + 2.5%) ÷ (11%– 2.5%) = UK£6.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£6.5b÷ ( 1 + 11%)10= UK£2.3b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is UK£6.1b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of UK£0.9, the company appears a touch undervalued at a 28% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.LSE:JD. Discounted Cash Flow July 22nd 2025

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at JD Sports Fashion as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 11%, which is based on a levered beta of 1.611. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Check out our latest analysis for JD Sports Fashion

SWOT Analysis for JD Sports Fashion

Strength

Debt is not viewed as a risk.

Weakness

Earnings declined over the past year.

Dividend is low compared to the top 25% of dividend payers in the Specialty Retail market.

Opportunity

Annual revenue is forecast to grow faster than the British market.

Good value based on P/E ratio and estimated fair value.

Threat

Annual earnings are forecast to grow slower than the British market.

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For JD Sports Fashion, we've compiled three further aspects you should explore:

Risks: Take risks, for example - JD Sports Fashion has  1 warning sign  we think you should be aware of. Future Earnings: How does JD.'s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every British stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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