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Which is the best buy after recent updates, ASOS or Tesco?

Online fashion retailer ASOS (LSE: ASC) delivered its half-year results on 10 April revealing that although revenue increased 14% compared to the equivalent period a year earlier, diluted earnings per share plunged 88%.

Chief executive Nick Beighton said in the report the market was more competitive in the period and the firm has pinned down “a number of things” it can do better. He is confident of an improved performance” in the second half of the company’s trading year.

Investing for global growth

I reckon the stock market saw the profit collapse coming. The share price plunged by more than 70% from its peak during 2018 and has so far spent 2019 clawing its way back up, but there’s a long way to go before the stock repeats past glories.

City analysts following the firm expect earnings to rebuild going forward, and Beighton said ASOS is close the end of a “major” programme of capital expenditure. While painful in terms of disruption and costs in the short term, he reckons the CapEx investment has given ASOS global capabilities to capture more of the growing online fashion market estimated to be worth more than £220bn. Beighton is confident the company will restore profitability and accelerate its generation of free cash flow.

He outlined the firm’s vision saying there will only be a “handful” of companies with global scale in the market in the future and the directors are “determined that ASOS will be one of them.”  The strategic and operational course looks set, but will the stock make a good investment from here? The recent share price close to 3,517p puts the firm on hefty forward-looking earnings multiple around 43 for the trading year to August 2020.

Meanwhile, supermarket chain Tesco (LSE: TSCO) released its full-year results on the 10 April revealing growth in revenue of 11% compared to the year before, and adjusted diluted earnings per share up just over 29%. The directors pushed up the total dividend for the year by more than 90% to 5.77p. The recovery under chief executive Dave Lewis looks like it’s going well.

This turnaround has essentially turned

It’s worth remembering that five years ago the dividend was a whisker below 15p. There’s still a long way to go before Tesco gets near its previous heights. But Lewis said in the report that the company has met, or is about to meet, the “vast majority” of its turnaround goals.  He’s “very confident” that Tesco will complete its turnaround journey in the current trading year.

If that’s the case, I think the valuation is too high. The stock market seems to be pricing in further recovery ahead. The recent share price close to 247p throws up an earnings multiple just below 15 for the current year and the forward-looking dividend yield is around 3%. I don’t believe Tesco’s ongoing growth prospects are great and would rather see a dividend yield above 5% and a P/E rating closer to, say, 10.

Given the choice between these two shares, I’d rather take my chances with the global growth prospects of ASOS.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Tesco. 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.