Is Mothercare plc A Better Buy Than WH Smith Plc And Ted Baker plc?

MothercareIt may seem strange to compare a baby/children’s retailer, a newsagent/stationer and a high-end fashion retailer, yet Mothercare (LSE: MTC), WH Smith (LSE: SMWH) and Ted Baker (LSE: TED) all sit within the same sector — general retail. Furthermore, they are all highly dependent upon the outlook and performance of the UK and global economies, with all three companies having a significant non-UK presence.

However, when it comes to share price performance the three companies have enjoyed very different journeys. Indeed, Mothercare’s share price is down 34% since the start of 2014, while shares in Ted Baker have performed almost as badly — down 25% over the same time period. Meanwhile, WH Smith has posted gains of 9%, beating the FTSE 100‘s flat performance.

Furthermore, Mothercare’s share price has fallen by another 9% today as the Chief Executive stated that the company must modernise if it is to return to pre-credit crunch levels of profitability. With short-term sales growth remaining uncertain, shares could continue to be volatile going forward.

Looking Ahead

Of course, it is the future share price performance that matters and on this front Mothercare could surprise investors. That’s because the company is forecast to deliver strong bottom-line growth, with adjusted earnings per share (EPS) set to increase by 34% in its current financial year, and by 78% next year. Certainly, sector peers WH Smith and Ted Baker are also offering investors above-average growth prospects, but neither of them are able to come close to those pencilled in for Mothercare.

For instance, WH Smith’s EPS is forecast to rise by 7% in the current financial year and by 9% in the next financial year. Certainly, both of these growth rates are above the index average, but are some way behind those of Mothercare. Similarly, while Ted Baker’s growth prospects are strong, growth of 20% this year and 16% next year is considerably lower than that of sector peer, Mothercare.

Valuation Issues

Despite falling by 34% since the start of the year, Mothercare continues to trade on a sky-high price to earnings (P/E) ratio of 25. However, when taking into account the company’s growth forecasts, Mothercare’s price to earnings growth (PEG) ratio of around 0.7 looks attractive. Indeed, it compares favourably to the PEG ratios of WH Smith (2.1) and Ted Baker (1.0). This shows that, although its headline P/E ratio is high, if Mothercare can deliver on its growth potential then it could turn out to be a strong performer going forward.

Certainly, WH Smith and Ted Baker carry less risk. As businesses, they have grown profits in each of the last five years, while Mothercare made large losses during the credit crunch. Therefore, while riskier, Mothercare could turn out to be the strongest performer, so long as the macroeconomic outlook continues to improve and its growth potential is realised. Its share price may remain highly volatile as it undertakes the necessary modernisation and investment highlighted in today’s update, but it appears to possess vast potential for the less risk averse investor over the longer term…

Despite its strong growth prospects, Mothercare lost out to this stock when it comes to growth potential.

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Peter Stephens has no position in any shares mentioned.