I’m fond of pointing to the similarity between the share price trajectories of Boohoo Group (LSE: BOO) and ASOS (LSE: ASC) before it.
On Wednesday, the ASOS share price spiked by 15% on the release of full-year results, so what does that say to both groups of shareholders? Well first, the ASOS results lived up to their upbeat expectations.
The firm saw revenue climb by £494m to £2,417m, up 26%. And in the hard-pressed UK market (which thanks to international expansion now accounts for only 37% of retail sales), we saw a 23% rise. That’s pretty impressive, considering how UK shoppers are supposedly reining in their spending.
Profit growth
Even during this capital-intensive expansion phase, ASOS managed to drive pre-tax profit up by 28% to £102m, and earnings per share came in similarly ahead at 98p.
Chief executive Nick Beighton made the point that “our reported profit increase was achieved despite bearing material transition costs due to our investment programme.“
Boohoo’s last set of results, interims delivered in September, showed the same kind of pattern — but with a bigger sales rise from a lower level at its earlier stage of development.
Revenue soared by 50%, and that also fed strongly through to the bottom line, with pre-tax profit up 22% and adjusted EPS up 31%. Boohoo also saw growth across all its international markets, with UK sales still growing nicely.
The question is, what should Boohoo shareholders learn from the experience of ASOS?
Any lessons?
There is the obvious similarity in the soaring growth pattern of their shares, and a sober lesson to be learned from ASOS is that it appears to have been pushed too far too soon — as happens so many times with what I term bandwagon shares. Although ASOS shares did touch a new peak earlier this year, they’ve since fallen back and are still not managing to hold the levels they reached as long ago as 2013.
If you’d bought ASOS at its early peak and held until today, you’d have had a poor ride.
So does that mean Boohoo shareholders are going to suffer the same pain? Not necessarily, and it’s all down to valuation. What really scared me about ASOS was the super-lofty P/E ratios its shares managed to reach. Over the past few years, it has regularly traded on multiples of around 60 to 70, which doesn’t leave a lot of room for safety.
But at least the P/E valuation of ASOS shares has subsided, and we’re looking at a forward multiple, based on August 2019 earnings, of only 42. That’s still high, but not enough to make my eyes water. And though I didn’t think I’d say this so early, I’m starting to see ASOS shares as possibly not overvalued.
Not as toppy
Looking back at Boohoo, though the share price performance looks remarkably similar, we don’t see quite the same super-high valuation levels. Forecasts suggest a forward P/E of 54 for February 2019, dropping to 44 a year later — actually around the same level as the more mature ASOS.
It’s possible that ASOS took the early pain and investors are now sharper when it comes to valuing Boohoo. And earnings growth could push both to new bullish phases. Saying that, I still see too much risk in both of them.
