Last week’s shock profit warning from ASOS hit the price of online rival Boohoo Group (LSE: BOO) as well.
In response, Boohoo rushed out a statement reporting record Black Friday sales. Management said that profits should be in line with existing City forecasts. But despite this reassurance, Boohoo’s share price is down by 20% so far this year.
If Boohoo can continue to outperform ASOS, then this could be a buying opportunity.
Is Boohoo better than ASOS?
Boohoo and ASOS seem similar at first glance, but there are some big differences. The first is that Boohoo only sells its own products. These are sold under three brands, Boohoo, PrettyLittleThing and Nasty Gal.
By focusing on own-brand sales, management has direct control over the style, price and quality of the products. It is also able to build a valued brand which customers seek out.
I think this is one reason why Boohoo is more profitable than ASOS. Boohoo generated an operating margin of 6.6% over the 12 months to 31 August. For ASOS, the equivalent figure was 4.2%. Now ASOS is warning that this margin will fall to 2% over the coming year.
I’m convinced that Boohoo is a better business than ASOS. But is Boohoo a buy?
After recent falls, BOO shares trade on a 2018/19 forecast price/earnings ratio of 39. Earnings are expected to rise by 22% during the current year and by a similar amount in 2019/20.
This gives the stock a price/earnings growth ratio (PEG) of 2.2, according to my calculations. That’s well above the level of 1.2 often used by growth investors to find undervalued stocks.
For investors with a long-term view, Boohoo may still be worth considering. But in my view the shares still look quite fully priced. I’d rate Boohoo as a hold, but I think there are better options elsewhere.
A real buying opportunity?
One stock that’s come onto my radar after recent falls is software group Craneware (LSE: CRW).
This £575m company produces software used in US hospitals. Craneware says that its products help to maximise revenue, control costs and ensure compliance. It’s not hard to see how valuable this could be, given that most American hospitals are privately run.
The Craneware share price has fallen by 35% since mid-September, thanks to the widespread market sell-off. In reality, I think the share price had run ahead of itself at more than £35. But I’m more interested in the stock at its current level of around £22.50.
You see, this is an extremely profitable business. Not only are profit margins high, at about 28%, but Craneware’s customers are generally quite ‘sticky’. Once the firm’s systems are embedded into a hospital’s processes, it’s hard to change to another supplier.
The firm earns revenue through multi-year contracts to supply and support its software. This means that forward earnings are generally very predictable.
Earnings per share have grown by an average of 14% per year since 2014, and this rate of growth is expected to continue. The dividend yield is modest at just 1.3%, but the payout has grown by nearly 13% per year, providing attractive income growth.
As with Boohoo, Craneware shares look fully priced on 39 times forecast earnings. But in my view this is a much better quality business with more robust profits. I’d consider buying these shares at current levels.