I would buy this FTSE 250 share rather than NEXT any day

Among consumer-focused companies, I think Cineworld Group plc (LON: CINE) makes for a far better investment right now than retail giant NEXT plc (LON: NXT).

| 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.

If the CEOs of the UK’s consumer-focused companies are losing sleep these days, I’m not at all surprised. It’s all but given that the economy will slow down post-Brexit, though how much and for how long hinges on how the exit deal is framed.

Potentially weaker macros, in this case consumer spending, won’t affect all companies equally though. I think businesses like FTSE 100 retailer NEXT (LSE: NXT) are likely to face rougher conditions than FTSE 250 cinema chain Cineworld Group (LSE: CINE). Here’s why.

NEXT: Financial outlook cloudy

The retailer’s latest results don’t inspire much confidence. While sales have improved, net profits have declined. Its outlook for 2019 is muted too, with sales growth expected to slow down to 1.7% from 3.1% this year. I’m not sure that should be the case, in so far as the company itself is optimistic about real earnings increases, a key leading indicator of demand for its products. In its own words: “Real Earnings in the UK have remained positive since January 2018 and look like they are still gaining strength as we move into 2019.” This doesn’t add up for me.

Also, pre-tax profits are already down by 0.4% in 2018, and are expected to continue to take a hit next year as well. While this can be attributed to structural increases in costs as the company ramps up online operations, to my mind it’s just not a good mix when combined with lower sales growth expectations. It’s not a total write-off, to be sure, especially with its strong cash-flows and rapidly growing online sales. But there are better performing companies out there that I feel would be a more reliable place for you to invest.

Cineworld: US focus bodes well

This brings me to Cineworld. The company reported a strong 7.2% revenue growth rise and a 9.4% increase in earnings before interest, taxation, depreciation and amortisation (EBITDA) in 2018. Strong US markets have buoyed overall performance, which accounts for 75% of the total revenue share. Sales have increased in the UK and Ireland as well, and while this geography has dropped the ball on profits, it was more than made up by the US and the rest of the world.

Among the companies I have researched, those with big chunks of business from outside the UK have shown good financial health and I think will continue to do so in the future as well. Cases in point being Ireland-based-but-US-focused construction company CRH and packaging and paper products provider Mondi. With the US economy expected to remain strong in 2019, the outlook for US-based businesses should be good too. This includes Cineworld. There’s some concern about the 10x increase in its debt levels during the past year, due to its acquisition of US-based Regal Entertainment. But given its recent financial performance, I think the integration is going well.

With this as the background, even if it faces some rough weather on account of the massive Regal investment, I still think that it’s capable of riding out the tough times, making the shares a good buy. I am less sure that NEXT would be able to handle a demand dip as well as Cineworld.

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.

Manika Premsingh has no position in any of the shares mentioned. 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.

More on Investing Articles

Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »