MKM Remains A JD Bull After Q4 Report, KeyBanc Still Unconvinced

Chinese e-commerce company JD.Com Inc JD reported fourth-quarter results Thursday that came in better than feared and warrant a continued bullish stance on the stock, according to MKM Partners.

The Analysts

MKM Partners' Rob Sanderson maintains a Buy rating on JD.com's stock with an unchanged $35 price target.

KeyBanc Capital Markets' Hans Chung maintains at Sector Weight.

MKM: Compelling Valuation

JD's fourth-quarter results beat expectations, and the company ended fiscal 2018 with a favorable setup for 2019, Sanderson said in a Friday note. 

The first-party category mix contributed to topline growth in 2018, with consumer electronics and appliances growing 18.5 percent — notably higher than the industry average, the analyst said.

The momentum could be sustained in 2019, as the Chinese government could offer incentives to support appliance sales, and this could lead to net margin and gross profit dollar growth, Sanderson said. 

JD has other venues to show margin improvement in 2019, such as advertising and commissions revenue, which rose by a combined 32 percent in 2018, he said. JD Logistics revenue rose by 140 percent last year and could benefit more as start-up incentives roll off and the company builds scale, the analyst said. 

Finally, JD's stock is trading at around 0.4 times 2019 sales, or 0.2 times sales excluding stakes in JD Finance and JD Logistics, according to MKM. The valuation looks "compelling" ahead of expectations for 20-percent sales growth in 2019 and improving gross margins, in the sell-side firm's view. 

Related Link: JD Down After Q3 Print, But Many Analysts Remain Optimistic

KeyBanc: Challenges Remain

JD's earnings report came in better than expected, but two items beyond the headline numbers were not favorable, Chung said in a Thursday note. 

They are:

• Maturing customer growth rose just 4 percent year-over-year and was flat from the last quarter, which falls short of growth numbers that rival Alibaba Group Holding Ltd BABA is showing.
• A notable deceleration in commission and ad revenue growth from lower commission rates on JD Pingou.

The JDL Logistics Properties Core Fund transaction is a near-term positive, but investors may want to wait to see how capital is redeployed, the analyst said. The company will have incremental rental expenses on the P&L line, which is viewed as its cost of capital for the proceeds, he said. 

A fair value for the stock based on a discounted cash flow model through 2023 is $27, which implies 0.5 times 2019 sales, according to KeyBanc. 

Price Action

JD.com shares were trading higher by 3.99 percent at $28.82 at the time of publication Friday. 

Related Link: 8 Stocks To Watch For March 1, 2019