Despite what looks like impressive Christmas trading from Boohoo Group (LSE: BOO), the markets reacted unenthusiastically and the shares lost 9% of their value on the day of the announcement.
Although it’s regained a little in the days since then, the Boohoo share price has pretty much matched that of Marks & Spencer over the past month — and M&S is not the most stretching benchmark to try to emulate.
Boohoo shares are on a much higher valuation, with a forward P/E of nearly 48, while M&S’s stands at just 11 (and M&S is paying dividends too, with yields of nearly 7% on the cards.)
With strong growth on the cards for Boohoo, that’s perhaps not a fair comparison, and we should expect to see the online fashion firm’s shares commanding a significantly higher valuation. But such a high P/E is, I think, missing a couple of key threats.
Lurking dangers
It’s clearly factoring in some impressive progress, but I think missing some inevitable risks. Just as happened with ASOS before it, I see it as almost certain that Boohoo will experience some hiccups along the way and not every set of figures will meet expectations.
When that happens, highly-valued growth shares tend to take a tumble.
My other fear is that market pioneers need to make maximum use of their first-mover advantage, and that’s best done when a sector is booming. The current retail slump, which I see as going on for some time, could provide conventional retailers with a catch-up opportunity as they rapidly expand their online offerings.
Polar opposite
If Boohoo shares have been boosted beyond what I think they’re worth, I’m becoming increasingly convinced that the opposite is true for advertising and PR specialist WPP (LSE: WPP).
Warren Buffett famously said he looks for “businesses that are so wonderful that an idiot can run them because sooner or later, one will.” But that is not the case at WPP, as now-departed founder and shaper Sir Martin Sorrell was very much an intense hands-on leader.
Since Sir Martin’s departure, forecasts have been slashed. Analysts are now expecting earnings per share to have dropped by a third in 2018, with an additional 4% reduction marked in for 2019.
The share price has plummeted, resulting in P/E multiples of only a little over eight — Boohoo shares are currently trading at six times the WPP valuation!
Turnaround
We’ll need time to see how new CEO Mark Read performs, but I’m increasingly optimistic about the potential value that I see in the current uncertainty. Just as I think growth optimists have overpriced Boohoo shares, so I’m convinced that the bears have undervalued WPP’s.
After the firm’s strategic review, in December Mr Read set out “a new plan to return the business to growth.” The firm aims to simplify its offering, and Mr Read reckons it should deliver organic growth with a headline operating profit margin of at least 15% by 2021.
If it can achieve that, I see its dividends as being safe. After the share price fall, they’re expected to yield 6.8%, and should be adequately covered even by reduced earnings forecasts. With my expectation that 2019 could be a turnaround year in general, WPP looks like a buy to me.
