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Could ASOS plc Double To £42?

ASOSOnline fashion retailer ASOS (LSE: ASC) has suffered a tough 2014. The shares have plunged from £70 to £21 since February following various warnings about additional costs needed to expand the business further. It’s meant the group’s forthcoming annual results will show profits treading water despite sales soaring 27%.

But could now be the time to buy? Possibly.

For one thing, sales at ASOS have more than quintupled since 2009 and the group still reckons it can expand the top line from the current £975m to £2.5bn. Plus, there is the chance margins may get back to the 8% seen prior to the recent setbacks.

Here’s one scenario

Let’s say sales continue to advance at 27% a year, which will mean the sales milestone of £2.5bn is reached in four years’ time. Let’s also say margins return to 8% as well.

If those assumptions come good, we get operating profits of £200m and earnings of perhaps £156m.

Then assume a P/E of 20 and the current share count stays at 83 million, and the share price in 2018 could be £37.

That would equate to a 15% average annual share-price gain, which seems attractive to me.

Here’s another scenario

Let’s say sales advance at a 20% average a year, which will produce the sales milestone of £2.5bn in five years’ time. Let’s also say margins actually grow to 9%.

If those assumptions come good, we get operating profits of £225m and earnings of perhaps £176m.

Once again assuming a P/E of 20 and the current share count stays at 83 million, then the share price in 2019 could be £42.

That would also equate to a 15% average annual share-price gain. Again, not bad.

All told, while these scenarios may not say ASOS is a screaming buy right now, my rough sums do suggest there is a chance of decent double-digit gains to be had should sales continue to grow and margins recover.

Of course you can fiddle about with all the assumptions to build your own projections and then make your own decisions.

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Maynard Paton has no position in any shares mentioned. The Motley Fool UK owns shares of ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.