There’s upside left in Next (LSE: NXT) stock.
In fact, I reckon the shares of the clothing and home products retailer will comfortably outperform the sector and the broader market to the end of 2015, even though those in the bear camp may argue that Next stock is not cheap.
Monday Blues
A warning came on Monday as Associated British Food (LSE: ABF) reported its trading update. The Primark owner is struggling with its sugar division, but ABF stock underperformed the FTSE 100 index by almost five percentage points because the growth of Primark has come in just in line with consensus and the company has only managed to reaffirm guidance for the year. Investors are taking profits, yet ABF remains a strong long-term investment whose value could surge, particularly if ABF entertains ad-hoc disposals — which aren’t strictly necessary. Net debt is falling.
Next stock was down 1.2% on Monday.
Valuation
Next stock trades around record highs, and has been on a roll for a few weeks now. Next is a solid retailer, with strong fundamentals, which is growing organically, and its equity valuation is less volatile than those of smaller high-street rivals. Its balance sheet is overcapitalised, which leaves plenty of room for shareholder-friendly activity. The shares are not in bargain territory, but they still trade 11% below fair value, according to my calculations.
Its market cap plus net debt (Enterprise Value) stands at 12.3x forward earnings, before interest, tax, depreciation and amortisation (EBITDA). This is a high ratio for such a retailer, so Next needs lots of growth to continue its formidable run on the stock exchange. Growth for earnings per share is expected at about 10% both in 2015 and 2016, but if Next’s recent performance is anything to go by, Next could surprise investors in the next year or so.
“Others”
Next offers better value than Supergroup (LSE: SGP) and ASOS (LSE: ASC). The equity valuation of the former has rallied in recent days, while the shares of ASOS have been under pressure for some time as competition intensifies and profitability shrinks. Supergroup stock trades at an EV/EBITDA of 9.8x and 8.5x for 2015 and 2016, respectively, which may indicate fair value. Is that right? These trading multiples properly reflect Supergroup’s risk profile, in my view. As far as the valuation of ASOS is concerned, ASOS stock trades at a forward EV/EBITDA of 33x, which is demanding.
The most appealing feature of both companies is that they could be acquired by larger rivals and private equity firms. ASOS stock recently surged in the wake of takeover speculation. Other than that, however, I don’t see why investors should bother, unless they decided to hold either stock as part of a diversified portfolio.
