This FTSE 250 stock has jumped on good results. Here’s what I’d do now

I’m examining a FTSE 250 stock that has had a poor five years, but has been bouncing back in 2020. Is this a sustainable recovery?

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Frasers Group (LSE: FRAS) is in the headlines once again. This time, the boss of the FTSE 250 firm, Mike Ashley, is targeting Debenhams after it fell into administration. Oh, and first-half results are out.

There isn’t much time to lose as Debenhams is set to close all its stores by March. The collapse of Arcadia, with its brands that include TopShop, Burton and Dorothy Perkins, also complicates things. Arcadia was Debenhams’ biggest concession holder, and its demise was the back-breaking straw.

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I can’t really tell what shareholders might think of Mr Ashley’s latest ambition. Over the past week, the Frasers share price hasn’t really moved. And it has already started falling back from November’s high point. It has, however, performed well in 2020 by FTSE 250 standards. By Wednesday, Frasers had fallen just 4% in 2020, while the index is down 9%.

A poor five years

Over the past five years, Frasers stock has lost 25%, against an 18% gain for the FTSE 250 index. And there’s no dividend, so it hasn’t been a great investment. But is that about to change in 2021?

The latest update Thursday certainly had a positive effect. The Frasers share price gained 6% approaching midday, on the back of improved first-half profits. Revenue fell 7.4%, hit by the Covid-19 impact on high street shopping. But the company reported a 24.9% rise in underlying EBITDA, with underlying EPS up 51.9%.

In 2020 especially, the strength of a company’s balance sheet can be critically important. Net debt dropped a fraction, by 1.7% to £250m. That’s reasonable compared to that improving EBITDA, so I don’t think I should worry. And underlying free cash flow rose by 55.6% to £252.6m, which is encouraging.

Beating the FTSE 250 index

As I write, Frasers is leading the FTSE 250 on the day. So would I buy now? Not on the back of one set of first-half results. No, I’d need to have a reasonably clear view of a firm’s long-term prospects. And I find the outlook cloudy, for several reasons.

Comments made by chairman David Daly echo one of my main concerns. He suggested that “much of the UK High Street, which was already suffering before Covid-19, won’t survive unless the Government addresses the out of date business rates regime which is due to return come April 2021.”

People might start returning to shopping in high volumes in the coming months. But there’s still a long-term problem. With the efficiencies and cost savings associated with online shopping and the underlying distribution networks, costs of doing business are increasingly stacked against high street sellers.

Not my style

Then there’s Mike Ashley’s leadership. He’s very keen to expand by acquisition, particularly buying up failing companies. And now there’s Debenhams again, which itself fell from glory and dropped out of the FTSE 250 index some years ago. I tend to prefer my chief executives to be a little more on the cautious side.

Then again, Mr Ashley can be a tough businessman, and maybe that’s what’s needed right now. He does appear to be steering Frasers Group comfortably through the pandemic crisis.

But we’re looking at a forward P/E of 23, which I think is too rich. I see better growth buys out there.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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 considered, so you should consider taking independent financial advice.

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