The Boohoo (LSE: BOO) share price has put in a very mixed performance over the past 12 months.
After rising close to an all-time high in May, it fell back in July, although it has since recovered all of these losses. Over the past 12 months, the stock is up 39% and over the past five years, it has produced an annual return of 41%, turning every £1,000 invested into £7,500.
Great success story
Boohoo is one of the London market’s great success stories of the past five years. The company has gone from strength to strength since its listing in March 2014, and it doesn’t look as if it is going to slow down any time soon.
According to a trading update issued by the business today for the first half of its financial year, management now believes “that results for the current financial year will be ahead of previous guidance, with group sales growth now expected to be between 33% and 38%.“
Boohoo had previously been expecting sales growth of between 25% and 30% for the full-year. On top of this, management anticipates “EBITDA margins for the financial year to remain at around 10%,” a performance which reflects “anticipated investments across the financial year into the three brands acquired by the group in the first half.“
So far this year, Boohoo has acquired the online businesses of fashion brands Karen Millen, Coast and MissPap.
Today’s trading update from the company seems to suggest Boohoo is on track to report earnings growth of as much as 38% for its current financial year.
This is slightly above what the City was expecting. Analysts had pencilled in earnings growth for the year of 35%. That being said, Boohoo’s figures are only based on trading during the first half of its financial year, and a lot could change in the second half.
Still, I think it is highly impressive that the company can achieve such a fantastic performance when the high street is struggling to remain solvent.
Boohoo’s earnings growth is highly impressive, but the one thing I am worried about is the company’s valuation.
You see, at the time of writing, the stock is trading at a forward P/E ratio of 49, based on current City growth forecasts. As I have noted above, these forecasts are now out of date, but they are not that far off the mark. Even after factoring in Boohoo’s better than expected growth rate, the stock is still trading at a forward P/E of more than 40.
If the earnings continue to grow at a rate of 30%+ per annum, this valuation shouldn’t be a problem. Indeed, it hasn’t been for the past five years.
However, if growth slows, then the market could punish the stock quite severely. The problem is, if sales do slow, investors are usually the last ones to know, which means it is difficult to get out in time.
With this being the case, I’m quite happy to watch from the sidelines for the time being. Boohoo is a growth champion, but I think its premium valuation is just asking too much.
Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo group. 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.