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I’m bearish on this growth stock for 2017 despite 12% sales growth

Image: The Motley Fool Editorial.

Shares in AO World (LSE: AO) have fallen by 8% today despite the company reporting positive results for the first nine months of the year. The online electrical retailer recorded a rise in sales of 12.3% in the third quarter of the year, but an uncertain future could lead to its performance suffering somewhat in the final quarter of the year. Here’s why I think it could be a stock to avoid in the short run.

Improving performance

As mentioned, AO’s sales performance in the third quarter was upbeat. In the UK, its business continues to grow and it delivered a rise in overall revenue of 8.9%. This was against tough comparators from the prior year, which makes the results even more impressive. In Europe, sales increased by 28.4% on a constant currency basis. This reflects a period of focus on building the company’s logistics capabilities and capacity, in order to provide a solid base for the business to grow.

In terms of its long-term plan, the company has made progress on delivering sales growth across all of its regions. Its launch of computing sales in the UK has been successful thus far, and the same can be said of its audio-visual offering in Germany. Further expansion is in the pipeline and the business is expected to move from loss to profit in the 2018 financial year. This has the potential to boost investor sentiment over the medium term.

A difficult outlook

In the near term, though, AO has an uncertain future. Today’s update contains a degree of caution regarding the final quarter of the year, given the UK’s uncertain economic outlook. Inflation is expected to rise to around 3% this year, which could put it ahead of wage growth. This would leave consumers with less disposable income through which to afford purchases, with discretionary and larger items likely to be delayed until the situation improves.

AO could therefore endure a difficult few months, with the overall impact of Brexit likely to be negative for the business. Alongside this, the company faces potentially negative currency impacts on supplier pricing which could also hurt its performance.

A better buy?

Sector peer Sainsbury’s (LSE: SBRY) faces a similar challenge. Its purchase of Argos means that it is more focused on discretionary items than in the past, which could hurt its near term performance. Although its recent results showed that the company is making good overall progress, higher inflation is likely to have a detrimental impact on its business. Since its bottom line is already forecast to decline by 17% in the current year, it also seems to be a stock to avoid at the present time.

Of course, both companies offer bright long term futures thanks to their sound strategies and the likelihood of a sustained economic recovery in future years. However, it may be possible to buy them both at more attractive prices than those at which they trade today.

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Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.