Boohoo.Com (LSE: BOO) shocked the market yesterday by issuing a profit warning, only three months after reporting that it was on-track to meet full-year expectations.
Management now expects full-year profit to be around 26% lower than initially predicted, as a marketing push failed to deliver the level of sales growth expected.
However, during the ten months to 31 December, the company’s European operations reported top line growth of 47% and over the year Boohoo’s gross margin increased by 0.3% to 59.9. So it wasn’t all bad news.
But after slumping 40% after yesterday’s announcement, is now the time to buy Boohoo?
Initial City figures suggest that Boohoo’s earnings per share are set to come in at around 0.83p for this year, a full 33% lower than initially expected. These figures have been put out by analysts despite management’s own prediction that full-year profit will be 26% lower than previous forecasts. Previous forecasts were calling for the company to report earnings of 1.19p per share this year.
It is also reasonable to assume that Boohoo will report lower-than-expected figures next year as well. At present, the City is predicting earnings per share of 1.6p for 2016. Reducing this figure to reflect a 33% reduction in profitability gives a projected 2016 EPS figure of around 1.1p.
So, based on these figures, even after yesterday’s decline, Boohoo is trading at a forward P/E of 20.
Still, a forward P/E of 20 is high, but not overly demanding for a growth company like Boohoo.
You see, even though Boohoo warned on profits yesterday, the company reported organic sales growth of 25% during the period, despite the UK’s challenging retail environment.
Further, even though the group is investing heavily in its core operations and marketing, Boohoo’s cash balance is growing. The company’s cash balance currently stands at £60m, around 5.3p per share, which gives some downside support if things go catastrophically wrong.
Additionally, even using lower growth estimates, Boohoo’s earnings are expected to expand nearly 40% during 2016, which gives a PEG ratio of 0.5.
Even though Boohoo’s high valuation can be justified, risks remain. For example, at present levels the company is trading at a high P/E and there’s no book value support. What’s more, the company has already warned on profits once, there’s no reason to suggest that this won’t happen again.
Overall, Boohoo is a risky bet. The company’s high valuation can be justified if the group can hit its targets. If not, there’s very little to stop the shares falling another 50%.
Nevertheless, only you can decide if Boohoo fits in your portfolio and I thoroughly recommend that you do some additional research before making a trading decision. And if you do decide to buy Boohoo, a basket approach will work best.
Simply put, a basket approach combines a selection of risky growth stocks with a core portfolio of defensive dividend paying companies. Using this method allows you to reduce risk and sleep soundly at night.
Just click here to download the report for free today and start building your dividend portfolio today!
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.