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Why I’d buy this ‘secret’ growth stock over Purplebricks Group plc

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Judging by the volume and popularity of articles on the Motley Fool about Purplebricks (LSE: PURP), there are very few other growth stocks that have so effectively captured the imagination of retail investors.  

But the popularity of everyone’s favourite hybrid estate agent comes at the expense of less flashy but more dependable growth stars such as Ted Baker (LSE: TED), which continues to post double-digit sales and profit growth year after year and richly reward patient shareholders.

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Based on interim results for the 28 weeks to August, fiscal year 2018 is shaping up to be another great year for the fashion business. Sales rose 14% year-on-year in actual terms and 9.5% in constant currency terms to £295.7m as average retail space rose 4.9% and e-commerce sales leapt a whopping 43.8% to £42.7m.

During the period, pre-tax profits before exceptional items, which were actually a boost to earnings rather than a drag, clocked in at £24.2m, or 12.7% ahead of the prior year. This was a solid performance as management continued to invest in building out new distribution facilities to support international growth and inventory levels rose for the same purpose.

Looking forward, I see plenty of scope for Ted Baker to continue its fantastic record of uninterrupted sales growth since listing in 1997. Despite an 8.6% rise in constant currency sales from the UK and Europe, more growth over the long term will likely be driven by demand from North America and Asia, where the group is bulking up operations and saw sales rise in double-digits for the period.

With founder Ray Kelvin still running the show as CEO and keeping the brand true to its roots, impressive growth opportunities and a relatively sane valuation of 24 times forward earnings, I’d happily pick Ted Baker as a long-term winner.

Biting off more than it can chew?

Even though I like the company’s business model, I’m less sure about Purplebricks. My reticence is mainly drawn from the company’s valuation (which at £1.1bn against £46.8m in sales for the half year to October appears very stretched), and its rapid expansion.

After a rights issue last year raised £50m, the company still had £64.4m in the bank as of October, so cash burn isn’t critical yet. However, with operations at a group level still heavily lossmaking to the tune of £8.2m in H1 and expansion into the very large Australian and US markets sure to cost a bundle in marketing and admin terms, this will become a worry before too long.

Furthermore, while the company’s business model is a proven winner in the UK, at least in a bullish housing market, success in these other very different markets is far from assured. If things become rocky in either of them, expect Purplebricks’ astronomical valuation to plummet back to Earth.

This isn’t to say its rapid expansion is the wrong idea since its only real advantage over large incumbents is its first-mover status. Likewise, operations in the UK are now profitable and the group continues to take market share from traditional estate agents.

But with little to stop larger rivals from copying its business model if they become desperate enough, a very rich valuation and losses mounting, I’d have a hard time justifying purchasing shares of Purplebricks right now.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Ted Baker plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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