JD.com: Shares Pare Post-Stimulus Gains, Buy The Dip

seekingalpha11-07

I maintain a buy rating on JD.com due to its strong Q2 performance, robust free cash flow, and attractive valuation metrics.Despite potential risks from Trump's administration and a sluggish Chinese ...

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Robert Way  China stocks plunged in the wake of the US general election and former President Trump’s decisive win. Increased tariffs that were once looming are now a probable reality shortly after the 47th POTUS re-assumes office on January 20, 2025.  It’s not all dark clouds for the world’s second-largest economy, however. Recall it was just a handful of weeks ago when Chinese authorities announced a slew of stimulus measures aimed at reinvigorating below-consensus GDP growth trends in that economy. What’s more, shares of major China companies trade with low valuation multiples and broadly generate ample amounts of free cash flow per share. Given so many shifts in the last few months, I’m revisiting JD.com. I reiterate a buy rating on the Beijing-based Broadline Retail industry company. The stock has surged 50% since my summertime analysis. The jump was due to both a strong Q2 report and, of course, the vast stimulus announcement at the turn of September into October. Post-Election Country ETF Performance: China Weak Among Other Ex-US Spots   Seeking Alpha Back in August, JD reported an impressive set of quarterly results. Its second-quarter non-GAAP EPADS of $1.29 easily topped the Wall Street consensus forecast of $0.87 while revenue of $40.1 billion, up 1% from the same period a year earlier, was a material $710 million miss. JD’s operating EBITDA rose by more than 30% from Q2 2023 to a record $1.9 billion during the quarter.  What was particularly healthy was the firm’s operating cash flow which summed to $10.2 billion for the 12 months ending June 30, 2023 – a 41% advance YoY. Free cash flow over that stretch totaled $7.7 billion, a 66% increase YoY. I was encouraged to see that JD’s gross margin rose by 137 basis points during the period, which contributed to the record operating profit. It was yet another beat in a string that dates back to at least 2019, and shares gained 4.2% in the session that followed, despite the top-line miss. CFO Su Shan pointed out that comps to last year were challenging, perhaps leading to the light YoY revenue increase.  Moreover, competition remains intense from the likes of Alibaba (BABA) and PDD (PDD) as Chinese consumers turned more cost-conscious; of course, that was before the stimulus news was released. Finally, the $59 billion market cap company confirmed that it had bought back 136.8 million class A ordinary shares from April through June. On the earnings outlook, analysts expect a steep EPS rise this year with easing, though still robust, profit growth in the out year through 2026. Operating per-share earnings could climb above $4.50 in two years while sales growth is seen in the mid-single digits over the quarters ahead.  Profitability trends remain top-notch with JD – its trailing 12-month free cash flow per share is now $4.35, resulting in a free cash flow yield of 11%. Finally, sellside EPS revisions are decidedly positive in the past three months. JD.com: Revenue & Earnings Estimates, EPS Revision Trends   Seeking Alpha As for the valuation update, there are material changes. With better earnings trends, the forward 12-month EPS estimate is now $4.05, up from $3.70 in August. Also, I assert that a 12x multiple may now be more appropriate given a friendlier backdrop in the Chinese economy.  The risk is that the Trump administration will take harmful measures on non-US retailers, so I am hesitant to raise the earnings multiple assumption too much. The resulting valuation is $49, making the stock still undervalued today. Shares also trade cheap on a price-to-sales basis and when assessing the PEG ratio. JD.com: Attractive Valuation Metrics, High FCF   Seeking Alpha Key risks include heightened hostility from the US with Trump soon to take office. A sluggish Chinese economy, stimulus notwithstanding, could be a headwind for JD in 2025, too. Also, global competition in the e-commerce space and crackdowns on firms that engage in unfriendly labor practices could threaten China retailer valuations. Competitor Analysis   Seeking Alpha Looking ahead, corporate event data provided by Wall Street Horizon show a confirmed Q3 2024 earnings date of Thursday, November 14 BMO with a conference call immediately after the numbers hit the tape. The options market prices in a large 8.3% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the Q3 report, according to data from Option Research & Technology Services (ORATS). Seeking Alpha’s data show a consensus non-GAAP EPS forecast of $1.05 which would be a 14% increase from $0.92 of EPS earned in the same period last year. Corporate Event Risk Calendar   Wall Street Horizon The Technical Take A lot has also changed technically with JD. Notice in the chart below that shares broke out from a protracted downtrend late in the third quarter. A pair of upside gaps culminated with JD touching above $47. The stock has fallen hard since its October peak, however, and I see potential support at its rising 50-day moving average. Also take a look at the longer-term 200-day moving average – after many quarters of trending downward, it has inflected positive – a sign that the bulls are taking control of the primary trend.  After breaking free from a triangle consolidation pattern that lasted from early 2024 through mid-September, a new uptrend could be underway. I like that JD has eased off its RSI momentum high, but I could also see the stock filled a downside gap down to near $33. If it does, that would be an ideal spot to add to the stock. For now, following the high-volume thrust in the last seven weeks, I am encouraged to see the multi-year bearish trend give way to upside price action. JD: Bullish Triangle Breakout, Rising 200dma, Shares Correcting   Stockcharts.com The Bottom Line I have a buy rating on JD.com. I see the China retailer as undervalued ahead of its Q3 report next week while the technical situation is encouraging despite the stock’s high volatility.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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