Does Boohoo.Com plc’s PrettyLittleThing acquisition make it 2017’s best growth stock?

Shares of online fashion group Boohoo.Com (LSE: BOO) rose by 8% to 128p this morning, after the group said that full-year results would be ahead of expectations. The company also said it would acquire a majority stake in fast-growing fashion peer, which is run by the son of Boohoo’s chief executive.

I’m going to take a look at the numbers behind today’s news, and ask whether Boohoo is still cheap enough to buy. I’ll also take a look at an alternative growth stock, whose shares are up sharply today on news of a major acquisition.

Sales are rocketing higher

Boohoo sales are expected to rise by between 38% and 42% during the current year. That’s significantly higher than the firm’s previous guidance of 30%-35%. When a retailer reports rapid sales growth, you should always check what’s happening to profit margins. The easiest way to stimulate sales is to cut prices and accept a lower margin on each sale.

That doesn’t seem to be happening here. Management expects an EBITDA margin of between 11% and 12% for the current year, slightly ahead of previous guidance of “around 11%”.

The other big news from this fast-growing firm is that it has acquired PrettyLittleThing, a competing fashion website run by Umar Kamani. Mr Kamani is the son of Boohoo boss Mahmud Kamani, so there was an obvious conflict of interest here. To resolve this, Boohoo has taken control of PrettyLittleThing for £3.3m, using a call option set up when Boohoo floated.

PrettyLittleThing is almost certainly worth much more than this, so what’s happened is that to incentivise the company’s management (and tie them in) they have retained a 34% stake in their company. They will be given the chance to sell at market value in 2022, which could result in a big payday.

Today’s trading update from Boohoo is very positive, in my opinion. However, this doesn’t necessarily mean that the stock is a buy for 2017. At 128p, the shares trade on a 2016/17 forecast P/E of 75, falling to a P/E of 59 for 2017/18. This gives a PEG (P/E growth) ratio of 2.7 for the current year. That’s very high — PEG ratios of less than one are normally considered attractive for growth stocks.

An affordable growth star?

Litigation investment company Burford Capital (LSE: BUR) looks more affordable. The fast-growing group has a PEG ratio of just 0.8 for the year ahead, despite the stock having risen by 172% so far this year.

This morning’s 13% surge was driven by news that Burford has acquired a company called Gerchen Keller Capital for $160m. The acquisition will add $1.3bn of assets under management to Burford’s portfolio. Gerchen is expected to generate revenue of $15.4m and an operating profit of $9.1m in 2016. This implies an operating margin of 59%, which is very similar to that of Burford.

Today’s deal values Gerchen at about 17 times operating profits. That’s roughly the same as Burford Capital’s pre-deal valuation, suggesting that the $160m purchase price is quite reasonable.

Is this fast-growing business a buy?

Management expects today’s deal to result in an immediate increase to earnings per share. I estimate that 2017 earnings forecasts could rise by about 10%, which would give Burford a 2017 forecast P/E of about 15. That seem reasonable to me.

Potential triple-bagger?

Boohoo and Burford could rise further in 2017. But the Motley Fool's expert analysts have identified a different company which they believe could triple in value over the next few years.

The company concerned is involved in the retail sector, and is well-known in the fashion world. This business could surprise you. I strongly recommend you take a look for yourself.

You can find full details of this opportunity in A Top Growth Share From The Motley Fool. This exclusive report is free and without obligation. To download your copy today, click here.

Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.