Is It Time To Sell Or Buy Associated British Foods plc, Whitbread plc & ASOS Plc?

Associated British Foods plc (LON:ABF), Whitbread plc (LON:WTB) and ASOS Plc (LON:ASC) are under the spotlight.

| 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.

The valuation of Associated British Foods (LSE: ABF) has been boosted by Goldman Sachs on Friday, so the obvious question now is whether this would be a great time to take profit after its prolonged weakness. Elsewhere, you may also be tempted to cash in on Whitbread (LSE:WTB) and ASOS (LSE: ASC)…

Here are a few things you should consider before pulling the trigger, however. 

Associated British Foods

Associated British Foods is up 2.4% at the time of writing as Goldman Sachs upped ABF’s target price to 3,120p. ABF currently trades at about 3,000p a share (the average price target from brokers stands at 3,075p), which implies 2015 multiples of 36x for earnings and 16x for adjusted operating cash flow, respectively, falling to 28x and 14.5x in 2016.

On the face of it, ABF is not particularly cheap, but it could belong to a diversified portfolio — this is partly a bet on the possible divestment of its sugar assets. Operating margins are expected to rise until the end of 2017 on the back of rising revenues, which should grow by about 20% over the period, greatly outperforming ABF’s trailing performance. What a forward yield ranging between 1.2% and 1.4% means is that ABF remains a fully fledged play on organic retail growth. 

Whitbread

Whitbread has been trading around its current level of 5,185p a share since mid-February, but is up almost 10% in 2015. It’s less expensive than ABF, with net earnings multiples in the region of 20x for the next couple of years — its cash flow multiples point to a 20% discount versus ABF. 

Its new chief executive, Alison Brittain — who is set to start in early 2016 — has been recently defined by The Guardian as “one of the most powerful women in the City.” 

Given her background in retail banking, she was not an obvious choice, the newspaper noted — yet maybe she is a more obvious choice that many had thought, I’d argue.

It doesn’t look like Whitbread needs a lot of work to be done, to be honest — at least operationally. However, once led by a banker — albeit “just a retail banker,” one banking source pointed out — Whitbread could entertain extraordinary corporate activity such as spin-offs, which have long been rumoured and could help it released shareholder value.

Its balance sheet is strong, but its core margins are not expected to rise as fast as those of ABF. 

ASOS

ASOS is not an easy company to value, but as you might know, it could be a calculated bet in the mid-30s.

As you might also know, though, is that as ASOS continues to grow, falling operating margins may disappoint investors in future, which could sink the stock in a flash, just as it happened in the recent past. 

Trading multiples are almost prohibitive: based on net earnings for 2016 and 2017, ASOS trades at 85x and 70x, respectively. 

That’s not unusual for high-growth businesses, but to justify such a lofty valuation you must believe that revenues will almost double to £1.7bn in 2017, allowing ASOS to report net earnings of about £70m, assuming a steady net income margin at 4.1% over the period.

If that’s the case, ASOS may even start to pay a dividend by 2017.

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 Pasetti has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Close-up of British bank notes
Investing Articles

£20,000 in savings? Here’s how it could be used to target a £913 second income each month

Christopher Ruane walks through some practicalities of how an idle £20k could be the foundation for a sizeable long-term second…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

5 steps to building monthly passive income with a spare £10k

Christopher explains how an investor could aim to use some spare cash to start building regular passive income streams through…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Tesla’s struggling. Could NIO stock benefit?

NIO stock has moved up very slightly this year, while Tesla has crashed. Our writer considers whether it might be…

Read more »

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »