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Have £1k to invest? I think the Next share price could beat the FTSE 100

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With Brexit less than a month away, retail shares with UK exposure such as Next (LSE: NXT) could experience an uncertain period. Consumer confidence is weak and may deteriorate further if the prospects for the UK economy continue to be difficult to judge.

Despite this, the stock could offer investment potential. It has a low valuation as well as a track record of adapting to changing macroeconomic circumstances. Alongside a mid-cap share which reported an impressive performance on Monday, it could outperform the FTSE 100 over the long run.

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Improving performance

The other company in question is international engineering business Senior (LSE: SNR). Its performance in 2018 continued to improve, with revenue moving 8% higher to £1,082m. Adjusted profit before tax increased 15% to £83m, enjoying a run of strong orders. Free cash flow has remained healthy, reaching £45.3m after investing £56.3m in capital expenditure in order to enhance organic growth.

With the company expected to post a rise in net profit of 17% in the current year, it appears to have a bright future. Its update suggests 2019 has started in line with expectations, anticipating continued improvements in is overall performance despite the current global macroeconomic risks.

Trading on a price-to-earnings growth (PEG) ratio of 1.1, Senior appears to offer a wide margin of safety at the present time. This suggests that after what has been a mixed 12-month period in terms of its share price performance, it could generate improving levels of capital growth in the future.

Relative potential

As mentioned, Next has a history of being able to adapt its business model to changing trading conditions and customer tastes. It arguably faces its greatest period of change at the present time, with consumers demanding a seamless omnichannel experience and the wider retail segment facing weak sales growth.

However, in recent quarters it has reported continued sales growth. Its investment in online retailing (in which it has a longstanding advantage due to its Directory operation) is paying off, more than offsetting ongoing declines in its store sales. Although many of its peers have been under pressure to invest in pricing, Next also continues to invest in its wider business, seeking to capture a larger share of the leisure retail segment with more in-store cafes and the like. This is likely to be a sound move in the long run, since consumers are favouring experiences over just buying goods to an increasing extent.

With Next forecast to post a rise in earnings of 4% in the current year, there are a number of FTSE 100 shares that offer stronger profit growth potential. However, with a price-to-earnings (P/E) ratio of around 11.6, it suggests the stock could offer good value for money, and may be able to generate improving levels of capital growth over the long run. As such, now could be just the right time to buy a slice of it.

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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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