Undervalued opportunity

The current Boohoo share price is 93p. At this price, the stock trades on a price-to-earnings (P/E) ratio of just under 20. This might not seem cheap, but I still think the shares may hold some great value, especially when considering the future growth of the company.

As my fellow Fool Rupert Hargreaves points out, Boohoo has seen earnings grow at an average of 46% per year for the past seven years. If we assume the firm can continue to grow at a more conservative 10% for the next 10 years, it would hypothetically report earnings per share of about 15p in 2032. Assuming this, if the stock were to achieve industry average multiples — around 13 for the online fashion retail space — it could be worth 195p. This theoretical growth seems very enticing to me.

Looking at Boohoo’s close competitor H&M, I also see value. H&M trades on of a price-to-sales (P/S) ratio of 1.23, which is over double the Boohoo P/S ratio of 0.6. This further backs up my thesis that Boohoo’s shares may be undervalued.

Headwinds for the Boohoo share price

Although the share price does look cheap, there are a few concerns I have moving forward. The most pressing concern is some of the workers’ rights issues that have surrounded the firm in recent years. For example, in 2020, a Guardian report highlighted workers creating Boohoo garments being paid well below minimum wage. While the firm has recently taken steps to prevent such activity, these scandals have undoubtedly left a stain on the Boohoo brand name.

Another risk that I see affecting the share price in the short-to-medium term is the threat of rising interest rates. Both the US and the UK raised their rates last week to 0.25% and 0.75% respectively. When rates rise, investors tend to dump higher-risk growth stocks such as Boohoo. As the trend towards rising rates continues, the Boohoo share price could slide further.  

What I would do now

In my opinion, the current price does look cheap to me, especially considering it’s down over 70% from a year ago. However, if there’s one thing I’ve learned throughout my retail trading career, it’s that facts always trump hypotheses. While the shares might look cheap on paper, the risk of rising inflation and the branding scandals are both concrete factors. Therefore, I won’t be buying any Boohoo shares for my portfolio today.  

The post Is the Boohoo share price a bargain below 100p? appeared first on The Twelfth Magpie.

More reading

• Prediction: by 2027, this battered FTSE AIM stock could turn £3,000 into…

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

ESG concerns

The firm’s business model rests upon the speedy design, production, and advertising of its products – fast fashion. This allows high volumes of garments to be created for low costs to the consumer. While this may sound promising on paper, Boohoo has been embroiled in numerous worker scandals as a consequence.

For example, in September 2020, a report by the Guardian indicated that workers at third-party suppliers were earning well below minimum wage in addition to enduring poor working conditions. The firm was also subject to a class-action lawsuit after being accused of misleading advertising in the US. In my opinion, these are some of the key reasons why investors have turned sour on Boohoo shares.

Another headwind Boohoo is going to have to contend with in the coming months is the threat of rising inflation. As prices rise across the world, it could pose a serious risk to Boohoo’s low-cost, high-volume operations. And supply chain issues have already impacted the firm, leading to 10-day delivery times to the US, which is a vital sales region for Boohoo.

In addition to this, the 2021 Q3 results, released in December 2021, have highlighted that the firm’s pre-tax margin outlook has been lowered from 9% to 6%. Factoring in tax, these margins will shrink further. Falling margins lead to reduced profitability which is the last thing Boohoo needs.

Reasons to be cheerful about Boohoo shares

Yet one reason that Boohoo shares do appeal to me, is the fact that the firm owns a pretty impressive arsenal of brands. It acquired a number of these retailers out of administration in 2021, the largest of which was Debenhams. In addition to this, its US distribution centre is expected to open in 2023, significantly expanding operations in the region. The US contributed to a quarter of revenues in 2021, so this seems like a great move to me.

Couple this expected future growth with the current price-to-earnings ratio of just 9.3, and Boohoo shares do look attractive to me. Perhaps the current share price could offer me a discounted entry position for future growth.

What I’m doing now

Yes, Boohoo shares are cheap, and the firm has some exciting plans ahead. However, I think that short-term rising costs could place a huge strain on the firm this year, especially considering its low margins. In addition to this, the ESG concerns are a big moral red flag for me. Therefore, I won’t be adding Boohoo shares to my portfolio any time soon.

The post Boohoo shares are down 30% this month: should I buy now? appeared first on The Twelfth Magpie.

More reading

• Prediction: by 2027, this battered FTSE AIM stock could turn £3,000 into…

Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.