During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:
- Dividend cover
- Borrowings
- Growth
- Price to earnings
- Outlook
Some companies scored highly against the “business quality” indicators of level of borrowings, earnings growth record, and outlook. Others scored highly against the “value” indicators of dividend cover and price-to-earnings ratio (P/E).
Quality and value in harmony
However, the most promising investment opportunities scored well on both business-quality and value indicators.
In this mini-series, I’m revisiting some of the highest-scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond so, today, I’m revisiting UK-based fashion and accessories retailer Next (LSE: NXT), which scored 21 out of 25 in April.
Satisfactory recent trading
In a recent interim management statement, Next predicted that growth in earnings per share would be in the range of 15% to 21% for the year ending January 2014. That’s good progress, and further evidence that a focus on design and quality is paying off.
The firm seems to have captured the hearts, minds and aspirations of a large portion of the label-on-the-outside wearing mass market, which is reassuring for investors. City forecasters are currently expecting the earnings growth rate to ease down to about 8% for the year ending in January 2015. The latest management statement describes trading conditions as “volatile.”
Opportunity abroad
Last year, Next pulled in around 51% of revenue from its 6.7 million square feet of trading space and 46% from its directory business. The rest came from other sources. However, the company generates nearly all of its revenue in the UK, despite also operating in around 60 international territories, which collectively delivered just 1%.
Next still has it all to play for overseas, so growth is very far from off the agenda, in my view.
Business-quality and value score now
Since April, the shares have advanced around 26% to 5,495p, which combines with the lower forward earnings guidance to reduce my P/E score from three to 2/5. The rest of my business-quality and value indicators remain unchanged: forward earnings cover the forward dividend around 2.7 times, scoring 4/5; net debt is running at around 80% the level of operating profit, scoring 4/5; growth is intact, scoring 5/5; and good recent trading combines with a positive outlook to score 5/5.
Overall, I score Next 20/25 today.
What now?
In April, I thought Next shares were worth buying at some point. Given the share-price rise since then, it looks like right then would have been a good time!
Looking forward, the P/E looks full to me, and next year’s dividend yield is running at a lowly 2.4%. Now, I’m neutral on Next, so the shares are going back on my watch list.
