Forget Boohoo, this big-brand growth and dividend leader is selling cheap

If you think Boohoo Group plc (LON: BOO) is expensive, try this compelling stock opportunity.

| 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.

High-flying online fashion retail firm Boohoo Group (LSE: BOO) trades on a mighty historic price-to-earnings (P/E) ratio close to 90. However, City analysts’ forecasts of double-digit increases in earnings over the next couple of years bring the forward P/E rating down to a ‘mere’ 49 or so for the trading period to February 2020.

High stakes

At a valuation like that, the stakes are high, and any slip in earnings will bring a sharp share-price reversal. We’ve seen it many times. Expectations are everything with fast-growing firms. Miss the earnings projection and it’s ‘look out below!’ Yet Boohoo is growing like mad and there’s no sign of any weakness whatsoever in the firm’s financial performance. Maybe it’s worth its high valuation and will go on to reward its investors handsomely in the years to come.

I think there probably is a fair bit of upside left for investors in Boohoo, but you’ll need a strong constitution to ‘hold’. However, if the valuation puts you off you may wish to consider Ted Baker (LSE: TED) instead, which owns and operates what it describes as a “global lifestyle brand.”

The firm has grown from a single shirt specialist store in Glasgow and now sells clothes for men, women and children along with fragrance and accessories. Today, there are around 201 stores or concessions or outlets in Britain, 116 in Europe, 129 in North America, 89 in the Middle East, Asia and Africa regions, and nine in Australasia. There’s no sign that the expansion programme is running out of steam either. In fact, the opposite is true.

Expansion on track

Today’s interim results revealed that in the first half of the trading year the firm opened two new stores in the UK, three in the US, two in Germany and one in France, as well as gaining concessions with “leading department stores” in the UK, Europe and North America and establishing licensees in India, Kazakhstan, Malaysia, Mexico, Singapore, Taiwan and Ukraine. Despite such progress, the shares have plunged around 10% today as I write, so why is that?

The figures are quite good. Revenue rose 3.5% compared to the equivalent period last year and adjusted earnings per share moved 5% higher. The directors even expressed their vote of confidence in the outlook by pushing up the interim dividend by 7.8%. The ‘problem’ as I see it is in the outlook statement. Chief executive Ray Kelvin CBE said in the report that he expects the second half of the year to “remain challenging” because of “external factors.”

However, conditions have been challenging in the retail sector for some time, but Ted Baker posted a 1.8% fall in unadjusted earnings per share today, and I reckon the stock market is in an unforgiving mood right now. Nevertheless, the growth story remains on course, and I see share price weakness now as an opportunity to grab a piece of the long-term potential on better terms. With the share price close to 2,076p, the forward P/E for the trading year to January 2020 sits just under 13 and the forward dividend yield is a little below 3.7%. Meanwhile, City analysts expect earnings to grow at around 10% a year. I think the stock is attractive.

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.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group and Ted Baker. 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.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

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

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »