September proved to be a something of a disaster for Associated British Foods’ (LSE: ABF) share price, the stock shedding 15% of its value following the Primark owner’s patchy update at the start of the month.
Associated British Foods advised that “underlying operating performance of the group has been ahead of our expectation” during April-September, the firm adding that “the further weakening of sterling during the period since the EU referendum has resulted in a translation benefit.”
But currency issues could present troubles further down the line, the firm advised, noting that “if current sterling exchange rates continue… there would be an adverse transactional effect on the profit margin on Primark’s UK sales, a favourable transactional effect on British Sugar’s margins and a translation benefit on group profits earned outside the UK.”
Primark is Associated British Foods’ single largest division by some distance, responsible for 44% of group revenues. And well over half of the division’s sales are sourced here in Britain, leaving it at risk of significant margin pressure.
On top of this, profits from the company’s budget fashion could also take a hit should unfavourable weather patterns persist, and the impact of Brexit on shoppers’ wallets also dent shopper appetite. Associated British Foods estimates that like-for-like sales at Primark fell 2% during the year to September.
Still, the City remains upbeat about Associated British Foods’ prospects in the near term at least, and has pencilled-in a 12% earnings advance for fiscal 2017.
However, a combination of Primark’s possible troubles and a P/E ratio of 22 times certainly makes me reluctant to invest. Indeed, I reckon the retailer’s elevated earnings multiple leaves it in danger of additional share price weakness should retail data disappoint and sterling values deteriorate in the months ahead, a very possible scenario.
Swoop in and grab a bargain
Cut-price flyer easyJet (LSE: EZJ) has also endured significant turbulence in recent weeks as fears over consumer spending in the months and years ahead have risen. The business lost 9% of its stock market value in September as a result.
However, latest easyJet passenger numbers have belied fears that demand for its ultra-cheap seats are set to fall off a cliff — the airline shifted 7.5m travellers during August, up 6.4% year-on-year.
Rather, I believe the Luton firm’s focus on providing cost-friendly travel should stand it in good stead should British holidaymakers’ spending power come under pressure. Besides, the strength of the UK economy isn’t the be-all-and-end-all for easyJet, and I reckon the company’s route expansion scheme should continue to attract travellers across the continent.
Recent share price troubles leave easyJet dealing on a P/E rating of 9.4 times for the year to September 2017, underpinned by a predicted 6% earnings advance, which is some way below the FTSE 100 (INDEXFTSE: UKX) average of 15 times.
I believe easyJet’s long-term growth story remains extremely positive, and reckon the airline is a steal at current prices.
