ASOS plc: A Buy(Out) At This Price?

ASOS plc (LON:ASC) is worth a bet, writes Alessandro Pasetti.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

clothesThe share price of ASOS (LSE: ASC) has dropped 30% this year. Only a couple of weeks ago, it was down more than 40%. Taking a bet on the online fashion retailer at £42-£45 would make a lot of sense for an investor whose portfolio is properly diversified. It currently trades at the high-end of that range.

Still Growing Fast

ASOS turns over almost £900m from the UK (36% of the group’s sales), Europe (20%), the US (10%) as well as the rest of the world, but is expected to generate £1.6bn by the end of 2016. Emerging market exposure will increase over time.

Its top-line has grown at an impressive 30%-plus annual rate in the last couple of years, and forecasts are for a similar performance into 2016. Even if it grows, say, at 20% annually, it’ll be able to outperform most rivals. Growth is needed to shore up the retailer’s equity valuation, and management know that.

The retailer’s net cash position is £36m and minority interests are negligible, so its enterprise value (EV) is in line with its market cap, which means that debt can be raised to fund shareholder-friendly activity.

Short-Term Pain For Long-Term Gains?

This is a 14-year-old business valued at £3.7bn. Earlier this year, when its stock hit a record high of about £71, its market cap stood just a tad below £6bn.

ASOS trades at 4x EV/sales, which is a rich trading multiple for any business, but not for ASOS if management continue to deliver. The pressing question is whether ASOS will be able to remain profitable in future in the same way it has been in recent years.

ASOS got hammered in March as management informed analysts that a combination of lower growth and higher investment would hinder profitability. Just a few days earlier, its valuation had reached a peaked of 7 times sales and 85 times earnings before interest, taxes, depreciation, and amortisation (EBITDA).

Is this a case of short-term pain for long-term gains?

The stock hasn’t recovered since, although in the last couple of weeks it has recouped some of its lost value. There are signs that investors are building long positions.  

Deal Or No Deal

ASOS needs growth, and lots of it, to justify a higher valuation – or, alternatively, a takeover. While there’s no certainty that an offer will materialise, suitors are certainly monitoring how the valuation of the British group is impacted by less favourable trading conditions.

The free float of ASOS is 62%. Denmark’s Bestseller owns about 27% of the company; the Danish clothing retailer could certainly make an attempt at buying out ASOS. A debt-free balance sheet means that private equity may also be involved, but the chief candidate for a takeover is Amazon, whose stock is down 21% this year.

Meanwhile, interest from food retailers in the UK should not be ruled out. The ailing sector needs options and all the main players could be attracted to ASOS’s business model and its market-beating growth prospects. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro doesn't own shares in any of the companies mentioned. The Motley Fool has recommended shares in ASOS.

More on Investing Articles

Investing Articles

5 steps to start buying shares with under £500

Learn how this writer would start buying shares with a few hundred pounds in a handful of steps, if he…

Read more »

Young happy white woman loading groceries into the back of her car
Investing Articles

The FTSE 100 offers some great bargains. Is this one?

Our writer digs into one FTSE 100 share that has had a rough 2024 to date, ahead of its interim…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

£9,000 of savings? Here’s my 3-step approach to aim for £1,794 in passive income

Christopher Ruane walks through the practical steps he would take to try and turn £9,000 into a sizeable passive income…

Read more »

Group of young friends toasting each other with beers in a pub
Investing Articles

I’d buy 29,412 shares of this UK dividend stock for £150 a month in passive income

Insiders have been buying this dividend stock, which offers an 8.5% yield. Roland Head explains why he’d choose the shares…

Read more »

Red briefcase with the words Budget HM Treasury embossed in gold
Investing Articles

Could the new UK budget spell growth for these 6 FTSE stocks? I think so!

Mark David Hartley considers six UK stocks that could enjoy growth off the back of new measures announced in the…

Read more »

Investing Articles

With a 6.6% yield, is now the right time to add this income stock to my ISA?

Our writer’s looking to boost his Stocks and Shares ISA. With this in mind, he’s debating whether to buy a…

Read more »

Dividend Shares

This blue-chip FTSE stock just fell 12.5% in a day. Is it time to consider buying?

Smith & Nephew is a well-known, blue-chip FTSE stock with a decent dividend yield. And its share price just dropped…

Read more »

Investing Articles

At 72p, the Vodafone share price looks to be at least 33% undervalued to me

Our writer looks at a number of valuation measures to determine whether the Vodafone share price reflects the fair value…

Read more »