Is It Time To Double Up On NEXT plc, ASOS plc and Burberry Group plc?

Is now the right time to buy more shares in NEXT plc (LON:NXT), ASOS plc (LON:ASC) or Burberry Group plc (LON:BRBY)?

| 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 in high-street fashion stalwart Next (LSE: NXT) have hammered those of ASOS (LSE: ASC) and Burberry Group (LSE: BRBY) over the last five years.

Next shares have risen by 239% since 2010, compared to gains of 126% for ASOS and just 33% for Burberry.

I believe that all three companies have good long-term potential, but is now the right time to buy?

Next

Today’s third-quarter trading statement from Next demonstrated why this firm is the class of the field. Next reported a 6% rise in sales for the third quarter and a 4.4% increase in year-to-date sales.

Both figures were in-line with previous guidance. The firm also provided updated full-year financial guidance suggesting pre-tax profit will rise by between 3.6% and 8% this year. These figures are not unusual. Next’s post-tax profit has risen by an average of almost 12% per year since 2010, while its operating profit margin has risen from 15% to 21%.

Next has a strict policy of returning surplus cash to shareholders, either through share buybacks, if the shares are cheap enough, or through special dividends. This policy has reduced the total share count by nearly 25% since 2010 and will see shareholders enjoy an expected total dividend of £3.98 per share this year.

Next shares currently trade on a 2015/16 forecast P/E of 18.1, falling to 17.1 in 2016/17. Given the firm’s proven performance, I don’t think this is too expensive.

ASOS

Is ASOS the next Amazon or an overvalued online retailer? Views vary depending on who you ask. The company’s recent final results show that sales rose by 18% to £1.15bn last year, but pre-tax profits were only 1% higher, at £47.5m

Profits didn’t keep pace with sales because ASOS is investing heavily in new warehousing and IT capacity to support future growth. Investment totalled £50m last year and is expected to be £80m in the current year.

This investment in growth makes the shares look expensive, but the firm’s ability to generate cash is very impressive. ASOS generated net cash from operating activities of £93m last year, which was used to fund the firm’s £50m of investment spending and increase net cash to £119m.

Although ASOS does look expensive on 57 times 2015/16 forecast earnings, this could prove to be a reasonable price if growth and profit margins are maintained at current rates.

Burberry

Luxury goods retailer Burberry’s heavy exposure to the China market led to a profit warning recently. Earnings forecasts for the current year have been downgraded from 78.2p per share to 74.5p per share over the last month. This leaves Burberry with a 2015/16 forecast P/E of 17.7.

However, like ASOS and Next, Burberry is good at generating cash. Last year’s dividend was covered twice by free cash flow. Spending on new stores is self-funded and Burberry had net cash of £552m at the end of March.

Burberry is a high-quality business — the only question is how much investors should pay for the shares.

My view is that at today’s price of around 1,300p, Burberry rates as a hold, but isn’t cheap enough to be a compelling buy.

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 owns shares of and has recommended ASOS. The Motley Fool UK has recommended Burberry. 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 For Beginners

Here’s how I’m trying to prevent a stock market crash from ruining my portfolio

Jon Smith explains which shares he's avoiding and what he's thinking of buying to try and protect his portfolio from…

Read more »

Bearded man writing on notepad in front of computer
US Stock

Call me crazy, but here’s why I’m eyeing up the CrowdStrike share price

Jon Smith notes the carnage caused by Friday's global outage, but flags up why he's thinks the CrowdStrike share price…

Read more »

Investing Articles

What do Hargreaves Lansdown results mean for the share price?

The Hargreaves Lansdown share price has surged in recent months on takeover expectations, but what will the recent results mean…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

Newly minted S&P 500 stock CrowdStrike just crashed! Here’s why

Shares of S&P 500 firm CrowdStrike collapse as the company lies at the centre of a global IT outage. What…

Read more »

artificial intelligence investing algorithms
Investing Articles

Is Nvidia heading for the mother of all tech stock crashes?

Nvidia stock has soared, and the company briefly became the most valuable on the planet. But not everyone’s an AI…

Read more »

Dividend Shares

The BP share price is down 15% in 3 months. Time to buy?

In the space of just a few months, the BP share price has fallen by a double-digit percentage. Is this…

Read more »

Investing Articles

A 5.4% dividend bargain I’ll buy over Lloyds shares

Harvey Jones loves his Lloyds shares but now he's found a high-yielding FTSE 250 stock that may offer even more…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Recommended by Warren Buffett, this top hedge fund’s betting on Rolls-Royce shares

When Warren Buffett ended his previous investment partnership, he recommended Bill Ruane’s Sequoia Fund. Today, its largest investment is in…

Read more »