Could investors turn £10,000 into £21,429 in 27 months with this FTSE 100 stock?

Frasers Group is one of the least traded FTSE 100 stocks. But I think there’s a chance that an investment today could more than double by autumn 2025.

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Frasers Group (LSE:FRAS), the FTSE 100 retailer, has put in place a generous incentive scheme for its chief executive. Michael Murray will receive a £100m bonus if he can get the share price to £15 by October 2025.

With the stock currently changing hands for £7, Murray needs to more than double the company’s value for him to qualify for his enormous payout. If he succeeds, a £10,000 investment made today would become £21,429.

But it’s not going to be easy. He somehow needs to increase the company’s market cap by around £3.7bn.

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I don’t think that’s possible through organic growth alone.

Growing nicely

Between 2018 and 2022, the company grew its revenue and operating profit by 43% and 52% respectively.

It also increased its profit before tax by a factor of four.

That’s an impressive performance and, during this time, the company’s share price increased by 78%.

The revenue growth was achieved principally through the expansion of Sports Direct, and the purchase of some distressed brands such as House of Fraser and Debenhams.

Revenue by division2018 (£m)2022 (£m)Change (%)
UK sports retail2,1822,640+21
European sports retail637790+24
Rest of the world retail192150+63
Premium lifestyle1621,057+652
Wholesale and licensing186168-10
Total3,3594,805+43
Source: company accounts

Shopping list

The company’s appetite for buying companies and brands remains unsatiated. It recently stated that “driving growth through strategic investments is a core part of Frasers’ DNA“.

It’s been on a spending spree in recent times, quietly building up stakes in a number of other retailers. Four of the six are in the fashion sector but the other two — Currys and AO World — are in the business of selling consumer electronics.

The group now has interests in clothing, footwear, sofas, bicycles, televisions, computers, and video games.

StockLast purchaseOwnership (%)Value of shareholding (£m)
Currys22 June 20239.457
boohoo19 June 20235.021
ASOS15 June 202310.650
AO World12 June 202318.992
Hugo Boss6 January 20233.916
Mulberry Group19 November 202036.856
Source: regulatory filings

Few know whether the company intends to increase some or all of these positions further, with a view to launching a full takeover bid.

Personally, I think it’s going to have to buy at least one of them if its share price is to double by October 2025.

Valuation

Frasers expects to make a profit before tax of £450m-£500m in its 2023 financial year. We’ll know whether it achieved this later in July.

If the mid-point is realised, this would give a price-to-earnings (P/E) ratio of approximately 6.5. This compares favourably to JD Sports, which is valued at around 10 times’ earnings.

Even with a P/E ratio of 10, and a profit at the top end of expectations, the company would have a market cap of ‘only’ £5bn. It therefore needs to find another £1.9bn of value elsewhere. In my opinion, this is only possible with a major acquisition.

Although the company generated £628m of cash from its operating activities in 2022, I think it would have to raise more money if it were to increase significantly one (or more) of its strategic investments.

With borrowings around 2.5 times’ operating profit, and Mike Ashley — whose wealth is largely derived from his 70% shareholding — unlikely to be able to participate in a meaningful way, some creative solutions will be required.

But that’s why they pay Murray the big bucks!

Final thought

I already own shares in Frasers — I like the fact that the chief executive’s incentive means his interests are aligned with mine.

Although I’m cautiously optimistic that the stock will reach £15 by the autumn of 2025, there’s no guarantee. But I doubt there’s a harder working boss in the FTSE 100, given how much is at stake.

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The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

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Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

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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.

James Beard has positions in Frasers Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.

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