Does Boohoo.Com plc’s PrettyLittleThing acquisition make it 2017’s best growth stock?

Roland Head looks at the figures behind today’s gains for Boohoo.Com plc (LON:BOO) and considers an alternative growth pick.

| 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.

Shares of online fashion group Boohoo.Com (LSE: BOO) rose by 8% to 128p this morning, after the group said that full-year results would be ahead of expectations. The company also said it would acquire a majority stake in fast-growing fashion peer PrettyLittleThing.com, which is run by the son of Boohoo’s chief executive.

I’m going to take a look at the numbers behind today’s news, and ask whether Boohoo is still cheap enough to buy. I’ll also take a look at an alternative growth stock, whose shares are up sharply today on news of a major acquisition.

Sales are rocketing higher

Boohoo sales are expected to rise by between 38% and 42% during the current year. That’s significantly higher than the firm’s previous guidance of 30%-35%. When a retailer reports rapid sales growth, you should always check what’s happening to profit margins. The easiest way to stimulate sales is to cut prices and accept a lower margin on each sale.

That doesn’t seem to be happening here. Management expects an EBITDA margin of between 11% and 12% for the current year, slightly ahead of previous guidance of “around 11%”.

The other big news from this fast-growing firm is that it has acquired PrettyLittleThing, a competing fashion website run by Umar Kamani. Mr Kamani is the son of Boohoo boss Mahmud Kamani, so there was an obvious conflict of interest here. To resolve this, Boohoo has taken control of PrettyLittleThing for £3.3m, using a call option set up when Boohoo floated.

PrettyLittleThing is almost certainly worth much more than this, so what’s happened is that to incentivise the company’s management (and tie them in) they have retained a 34% stake in their company. They will be given the chance to sell at market value in 2022, which could result in a big payday.

Today’s trading update from Boohoo is very positive, in my opinion. However, this doesn’t necessarily mean that the stock is a buy for 2017. At 128p, the shares trade on a 2016/17 forecast P/E of 75, falling to a P/E of 59 for 2017/18. This gives a PEG (P/E growth) ratio of 2.7 for the current year. That’s very high — PEG ratios of less than one are normally considered attractive for growth stocks.

An affordable growth star?

Litigation investment company Burford Capital (LSE: BUR) looks more affordable. The fast-growing group has a PEG ratio of just 0.8 for the year ahead, despite the stock having risen by 172% so far this year.

This morning’s 13% surge was driven by news that Burford has acquired a company called Gerchen Keller Capital for $160m. The acquisition will add $1.3bn of assets under management to Burford’s portfolio. Gerchen is expected to generate revenue of $15.4m and an operating profit of $9.1m in 2016. This implies an operating margin of 59%, which is very similar to that of Burford.

Today’s deal values Gerchen at about 17 times operating profits. That’s roughly the same as Burford Capital’s pre-deal valuation, suggesting that the $160m purchase price is quite reasonable.

Is this fast-growing business a buy?

Management expects today’s deal to result in an immediate increase to earnings per share. I estimate that 2017 earnings forecasts could rise by about 10%, which would give Burford a 2017 forecast P/E of about 15. That seem reasonable to me.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »