French Connection (LSE: FCCN) is due to report its results on Monday, while Safestyle (LSE: SFE), a retailer operating in the home replacement market, released its trading update on Thursday.
Here I investigate if I should buy the shares of either company or whether ASOS (LSE: ASC) and Supergroup (LSE: SGP) offer better value.
Opportunity at 28p?
French Connection is not a name that I find particularly attractive based on its track record and its prospects of growth. With a £27m market cap, the best outcome you can hope for is a takeover; its lowly valuation could attract buyers, in my view, but even then I would not expect a big equity premium. Its business is split between wholesale and retail, and I am concerned about the latter in particular. Its market value is down 53% this year, and while the bulls might argue that its valuation is cheap enough, I would consider its stock only after two quarters of solid trading updates. Meanwhile, I’d back the management of Safestyle.
Safety at 248p
A manufacturer of uPVC windows and doors, Safestyle operates domestically in a buoyant market that is nicely growing and where it is gaining market share. Its half-year results showed that growth is not a problem, while its financials are rock solid. If anything, it would be nice to see a higher level of core profitability, but you’d be paying less than 14x 2015 earnings for its shares, and Safestyle could fare even better in the second half. If you had followed my advice in mid-July, you’d have picked up a defensive investment (+5%) that also offers a nice forward yield. If you are not interested in yield at all, and rich capital gains are all you can think of right now, then you should consider ASOS.
Value at 2,558p
The market is not in love with ASOS, but as the online retailer recently pointed out it is on track to deliver a core operating margin of 4%, while its growth rate in the UK (about 40% of revenue) — as well as that in markets such as the US — presents the opportunity to buy a stock that currently trades 1,600p — almost 40% — below its 52-week high. That’s not to say that ASOS is a completely safe bet because you really have to take some risk to invest in it, but a fair value in the range of 3,200p and 3,500p is very possible if market volatility subsides — and if it doesn’t, there’s a chance that ASOS wouldn’t become much cheaper, based on fundamentals. Nick Robertson, its founder and previous chief executive, is no longer leading the business, but I think investors overreacted to the news in recent days.
Growth at 1,343p
Supergroup’s rally seems unstoppable, with its shares up 57% so far this year. Its full-year results, which were released in July, showed a strong growth rate for revenues, but even more noticeable was the the rise in its gross margin, up 120 basis points to 60.9% (2014: 59.7%). Pre-tax income rose only 2% to £63.2m (2014: £62m), while earnings per share of 59.1p were mildly better than one year earlier. Its net cash position has deteriorated, however. The market is willing to give credit to Supergroup — its shares are much cheaper than those of ASOS — but it must do more to convince me that it is a value play at around 1,300p a share.
