Shares of shoe retailer Foot Locker (FL 5.46%) stock popped higher on Monday, responding to a modestly bullish note from J.P. Morgan over the weekend. As of 12:45 p.m. ET, Foot Locker is up a solid 5.5%.
J.P. Morgan’s note Sunday delivered a sort of backhanded compliment to Foot Locker. For one thing, analyst Matthew Boss actually lowered his price target on the shoe retailer — from $28 to just $20 a share, which doesn’t sound like a great start. For another, the J.P. Morgan analyst’s conclusion on Foot Locker wasn’t particularly exciting. He had Foot Locker rated neutral before the change in price target — and he has it rated neutral afterward as well.
And yet, while the analyst cut his estimated value of Foot Locker stock to $20, that’s still about 10% higher than the $18 and change that Foot Locker stock trades for today. This probably explains why investors are reacting positively to what could easily have been interpreted as a negative note from J.P. Morgan.
But should they be reacting positively?
Recall that Foot Locker just reported a 10% year-over-year revenue decline for the second quarter, and predicted that same-store sales for this year as a whole will also be down as much as 10%. Recall further that from an initial prediction of profits as high as $3.65 per share this year, Foot Locker now expects earnings to range from only $1.30 to $1.50 per share.
Then consider that even these diminished earnings are only of the pro forma variety. And to put that in context, when Foot Locker reported Q2 earnings, its pro forma results showed a $0.04 per share profit, while its earnings as calculated according to generally accepted accounting principles (GAAP) showed a loss of $0.05 per share. Viewed from the perspective of real GAAP results, meanwhile, it’s worth pointing out that most Wall Street analysts are forecasting only $0.84 per share.
Assuming analysts are correct, this would then value Foot Locker stock at more than 21 times earnings — with no dividend, and a “growth” rate that looks decidedly negative. J.P. Morgan may think all of this adds up to a neutral rating on the stock, but personally, none of this sounds like the kind of stock that I want to be invested in at all.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends Foot Locker. The Motley Fool has a disclosure policy.