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How high can FTSE 100-member Next’s share price go?

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The prospects for FTSE 100 retailer Next (LSE: NXT) may seem to be relatively downbeat at the present time. After all, the UK economy is experiencing major changes from both a political and economic perspective as a result of Brexit. This has contributed to a decline in consumer confidence which is hurting spending levels.

Despite this, the company’s stock price has made strong gains in recent years. It recently traded at its highest level since 2016. However, with what seems to be a low valuation, it could offer further capital growth potential alongside a dirt-cheap stock that reported positive results on Thursday.

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Improved strategy

The company releasing upbeat news was tool and equipment hire specialist HSS Hire (LSE: HSS). It released interim results which showed it’s making good progress under a new strategy. Adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) has risen by 74.7% to £29.9m, with underlying revenue growth of 8.7% showing that the transition to a new distribution model is working well.

The company’s refinancing and the sale of its UK Platforms business appear to have improved its long-term prospects. Its focus on the tool hire business has been a shrewd move, with customer demand increasing – especially for seasonal products.

Looking ahead, HSS Hire is expected to post a significant rise in pre-tax profit in the 2019 financial year. It is due to rise from £1.8m in the current year to £8m, which puts the stock on a forward price-to-earnings (P/E) ratio of around 10. This suggests that it could offer good value for money.

Certainly, it’s still early days in terms of the strategy change it has affected. But with encouraging early signs, it could deliver an improving share price performance.

Low valuation

The prospects for the Next share price also appear to be impressive. The company continues to offer a modest valuation despite it recently trading at a two-year high, having a P/E ratio of around 14.

This suggests that investors have not factored in its future growth potential, with the business expected to report a rise in earnings of 4% in each of the next two financial years. Due in part to the tough operating conditions faced by retailers, this would be a good result – especially given the company’s bricks & mortar focus.

Of course, Next’s online growth potential remains a key catalyst for its financial outlook. It has been able to generate positive online sales growth in recent quarters, which have helped to offset a declining store performance. This trend could continue over the medium term, with shoppers favouring digital over in-store shopping.

With Next being well-placed to transition towards an increasingly online-focused operation, its long-term future appears to be bright. It has a loyal customer base which seems to be less price-conscious than average, while a strong brand could help it deliver improving earnings growth over the medium term. As such, now could be the right time to buy it for the long term.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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