Today I’ll be revealing my top pick from three high-street retail giants whose shares are trading at attractive valuations. In my view all three represent excellent investment opportunities but only one can be awarded the gold medal, the others will have to settle for silver and bronze.
Income attractions remain
Long-term stakeholders in department store chain Debenhams (LSE: DEB) won’t have enjoyed watching their shares sink to five-year lows recently, with 30% wiped-off the company’s shares in the last 12 months alone. But despite this year’s sell-off, I’m still a little cautious over any short or medium-term share price recovery as City forecasts point to a downturn in earnings over the next two years.
However, I fully expect the FTSE 250-listed retailer to continue with its policy of dividend growth as prospective payouts look easily affordable at around two-times forecast earnings. For me, the recent weakness in the share price has created an attractive entry point for income investors seeking a rising dividend with the yield now reaching 6%. Third place on the podium for Debenhams with a bronze medal from me.
The phenomenal success of British clothing retailer Next (LSE: NXT) is undeniable, with its relentless rise in revenues and profits going back more than 15 years, coupled with equally impressive dividend growth. But nothing lasts forever, and the blue chip retail giant is experiencing a slowdown, with full-year results for FY2016 showing just 5% growth, compared to healthier double-digit rises in previous years.
More of the same is expected in the medium term with earnings remaining flat this year, and only 2% growth pencilled-in for FY2018. Despite the slowdown, I think the steep share price decline means the valuation now looks tempting for bargain hunters at just 12 times forecast earnings for FY2018, and now could be a good time to buy ahead of next month’s interim results. A good candidate for growth and a silver medal position.
No Brexit impact
Another high street chain down in the doldrums is Mothercare (LSE: MTC). The retailer for mothers and young children is still reeling from disappointing news earlier in the year when it highlighted difficulties in its international business. The small-cap retailer saw its shares fall off a cliff back in April with the lower oil price impacting on consumer sentiment in the Middle East, weakening confidence in Asia, and adverse currency moves in Europe and Latin America all contributing to a 10% drop in international sales.
The Watford-based business says it expects to see limited impact from the outcome of the Brexit vote during the full year, and indeed the shares were unscathed by the market sell-off following the referendum. City analysts are talking about an 8% rise in earnings this year, followed by an even better 15% improvement next year, with the P/E ratio falling to a modest 11 by March 2018. The strong recovery potential and attractive valuation makes Mothercare my #1 retail pick – gold medal.
Bilaal Mohamed 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.