The shares of many online retailers seem to trade at dizzyingly high multiples of their expected earnings. But while valuations seem stretched, the trading environment remains supportive, with very strong growth having the scope to drive positive earnings revisions in the medium term.
Boohoo.Com
There’s one online retailer I’m more positive on than most and that is Boohoo.Com (LSE: BOO). The company had its ups and downs last year — it had delivered impressive revenue growth, but a fall in gross margins raised concerns of intensifying price competition.
While growth in the e-commerce market continues apace, competition among online retailers is intense and margins have tended to be wafer thin. Traditional high street retailers are fighting back too, by expanding their online presence and offering competitive prices.
Boohoo is not immune to these market pressures, but its recent margin squeeze has more to do with the recent increase in investment in its newly acquired brands, such as PrettyLittleThing and Nasty Gal. Put simply, the company is sacrificing margins in exchange for faster revenue growth.
The group’s revenue rise for the current financial year is now expected to be around 80%, up from its previous guidance of around 60%. A lot of this improvement in its guidance is down to the better than expected performance from its PrettyLittleThing brand, which is now set to see revenue growth of approximately 150% this year, double its previous guidance of 75%.
City analysts are confident that Boohoo will also deliver strong earnings growth in the medium term. They expect this year’s underlying EPS will grow 27% to 2.8p in 2017/18, with further growth of 26% to 3.5p in 2018/9. These are impressive figures, but there could still be room for positive earnings revisions in light of its improved revenue guidance and the company’s recent trading momentum.
A cheaper growth stock?
Elsewhere, Cineworld (LSE: CINE) is another growth stock to watch out for in 2018. The cinema operator is looking to buy its larger US peer Regal Entertainment in a deal which would be transformative for the company.
The acquisition would greatly expand the scale and geographic footprint of Cineworld, putting it in a better position to fend off increasing competition from Netflix and other digital rivals, as well as giving it a better negotiation standing with studios, such as Disney. It is also expected to be strongly accretive to earnings in the first full year following completion.
Certainly, there are downside risks to consider too. Cineworld’s forward P/E of 14.5 pales in comparison to Boohoo’s forward P/E of 67.5, but the stock’s earnings multiple could still come under pressure as valuations converge with that of its less-highly-valued acquisition target.
Concerns about slowing growth and execution risks have already weighed heavily on Cineworld’s share price since the proposed acquisition was announced as shareholders weigh the benefits of merging the two companies against the costs. Nevertheless, I reckon more of the risk is on the upside, especially following a weak performance at the box office in North America last year. Many films over the summer failed to meet expectations, both critically and commercially, so the coming year’s results will likely get a bit of help from weak comparisons.
City analysts are sanguine, with the company’s earnings expected to grow by 9% in each of the next two years.
