Two elements were particularly noteworthy in my view, and evidently that of other investors. First it raised the lower end of its adjusted pre-tax profit range for the full year to £45m-£50m from £40m-£50m.

This reflects strong projected growth in its business-to-consumer retail revenues. These are expected to rise by 11% year on year for fiscal year 2025/26. Total revenue is expected to be up 13%.

And second, the firm announced its first-ever share buyback – of £10m — which tends to support price gains.

How was it doing before this?

I think any surge in the cost of living is a risk to its profits. It is these that ultimately power any firm’s share price over time.

However, so far AO World’s discounted pricing through its ‘Five Star’ membership programme is succeeding in retaining customers and attracting new ones.

Its fiscal year 2024/25 results released on 18 June saw a record like-for-like (LFL) annual profit before tax of £45m. LFL sales measure a retail business’s growth from its existing stores and space, excluding new store openings or closures.

This was up 32% year on year, which the company attributed to the expansion of its Five Star programme. More broadly, the year saw over 650,000 new customers buying from the firm for the first time.

AO World’s 12 December acquisition of musicMagpie is also yielding results – contributing £30m in revenue since then. The firm sees the buy as enabling it to further enhance its customer offer in the electricals market.

Analysts forecast AO World’s profits will grow by an annual average of 36% to end-fiscal year 2027/28.

So where does this leave the valuation?

A share’s price and its value are not the same thing. The latter reflects underlying business fundamentals, while the former is whatever the market will pay at any given time.

I believe the best way to quantify the price/valuation gap is through discounted cash flow analysis.

This clearly identifies where any stock price should trade, based on cash flow forecasts for the underlying business.

In AO World’s case, it shows the shares are 60% undervalued at their current 98p price. Therefore, their fair value is £2.45.

Will I buy the stock?

I am seriously tempted to buy the shares, given how packed with value they look. And I have found over the years that an asset’s price tends to converge to its fair value over time. In this case, given its very strong earnings growth forecasts, I think it may be sooner rather than later.

That said, I am always wary of buying stocks priced under £1 as this increases the price volatility risk of the stock. At my late point in the investment cycle (aged over 50), I prefer to minimise my risk profile. So I think for now that I will not be buying the shares.

That said, if I were even 10 years younger, I would buy them. Consequently, I believe they are well worth other investors’ consideration.

The post Up 18% since its H1 trading update, it’s surprising how much value is left in this high-flying FTSE 250 retailer appeared first on The Motley Fool UK.

For the year ending 31 March 2026, the group said it expected its adjusted profit before tax (PBT) to be £45m-£50m. Previously, it was forecasting £40m-£50m. This narrowing of guidance was enough to add nearly £70m to its market cap.

Sparks are flying

AO World puts its success down to offering a wide range of products for sale as well as its Five Star membership scheme. For £39.99 a year, customers are entitled to free delivery, other perks and special offers.

Due to its strong cash generation and “confidence in its future performance”, the group announced its first-ever share buyback programme worth £10m. It’s never paid a dividend.

However, retailing is highly competitive and even though it doesn’t have any physical stores to worry about, it still faces the same inflationary pressures as its peers. And if the UK economy fails to grow, it’s likely to experience a drop in demand for some of the less essential items that it sells.

Analysts have a 12-month price target that’s approximately 30% higher than its current (22 September) share price. And it’s attracted the attention of Frasers Group, which is now its largest shareholder. But its share price has stagnated over the past 18 months or so. And with a historic earnings multiple of nearly 26, its stock isn’t cheap.

As much as I like the group, I think there are better investment opportunities to research elsewhere.

In the doghouse

In contrast to AO World, Pets At Home Group (LSE:PETS) had a terrible week. On Thursday (18 September), the pet care business saw its share price tank 15.5% after it announced a profit downgrade and the immediate departure of its chief executive.

The group, which has over 440 stores — many of which have onsite vets and provide grooming services — said its underlying PBT for its current financial year ending in March 2026, would be £90m-£100m (down from £110m-£120m).

Year-to-date, the group has experienced a 5% drop in store sales. But it reported “strong growth” in its Easy Repeat subscription service for essential pet products. Those who sign up will receive automatic deliveries with guaranteed savings.

The group’s been steadily increasing its dividend since the pandemic. After the share price tumble, the stock’s now yielding 6.7%. However, a reduction in its payout could be on the cards given the anticipated fall in earnings.

These could come under further pressure if rumours about planned changes to commercial rates are enacted. The government is said to be exploring ways to shift the burden away from smaller stores towards larger ones.

But people love their pets. The group claims to have a 24% share of a market worth £7.2bn. And there’s plenty of evidence to show that it’s better able to withstand an economic downturn than many other sectors.

The group also retains a strong balance sheet. At 27 March, it reported a net cash position. I also like the fact that it has a price-to-earnings ratio of below 9. For these reasons, I think Pets at Home Group is a stock to consider.

The post It’s a case of good week, bad week for these 2 FTSE 250 growth shares! appeared first on The Motley Fool UK.

The following year it hit £4.29, before losing over 90% of its value by 2022. Over the past year, the shares are up 36%.

With the company having released its final results today (26 June), I have been looking at whether I ought to add the company to my portfolio in the hope of the AO World share price hitting its old highs above £4 again.

Sales are down, but profits are up

Last year saw revenues fall 9% to £1.0bn. That follows a recent trend of declining revenues for the company after years of steadily increasing sales prior to the pandemic.

Created using TradingView

The consistently declining sales trend is a clear concern to me. However, sales are still above where they were before the pandemic, even though they are well below their pandemic peak.

In part, those declining sales reflect an increased focus on profitability. The company says it has made a “strategic pivot to focus on profit and cash generation”. That has included moves like exiting the German market and controlling overheads.

The push for profitability seems to be working. Last year, basic earnings per share nearly quadrupled to 4.3p. That is the best performance since listing.

Created using TradingView

Investment case looks more attractive

Declining revenues concern me as in the long term, I think mass market retail is about selling high volumes. But getting rid of some unprofitable sales to boost earnings can make good financial sense, as I think AO World’s performance last year clearly demonstrates.

Net debt more than halved to £31m. The UK business increased its cash inflow to £22m. On the strategic priorities of improving profitability and cashflows, I think the business is headed in the right direction.

For the current year, the company expects to deliver double-digit revenue growth and adjusted profit before tax of £36m-£41m. That would be an improvement on last year’s adjusted profit before tax of £34m.

With a sizeable customer base, more focused operation and competitive position in a market area that will see long-term demand, I am positive about the investment case for AO World.

High P/E ratio

Still, even with the much stronger basic earnings per share, the company is trading on a price-to-earnings (P/E) ratio of 27, which I see as expensive.

Hitting a £4 share price implies a prospective P/E ratio of 93. For a home appliances retailer with fairly modest profitability that strikes me as far too pricey.

After all, net profit margin last year was just 2.4%. If a competitor – and there are many – decides to discount heavily, AO World risks losing sales, or else cutting its already thin profit margins.

The expected growth in adjusted profit before tax this year is not necessarily the same as a growth in earnings. For now, at least, I think the shares are pricy as they are. I would be shocked if they hit £4 any time soon and have no plans to invest.

The post Could the AO World share price head back to £4? appeared first on The Motley Fool UK.

Flipping to profitability

The company I’m talking about is AO World (LSE:AO). I’m sure many of us will be familiar with the electricals retailer, if only because of the catchy ad jingle. It offers a broad range of products, from washing machines to laptops.

A big factor in the share price movements recently has been the vast improvement in financial results. The half-year results that came out in November showed that the business has flipped from a loss in the same period the year before of £12m to a profit that time of £13m.

This is a big swing, and shows the results of the cost-cutting and efficiency drive that the business has been pursuing recently. For example, it mentioned that admin costs decreased by £9.4m over the year to £56m. This is a significant drop, with the savings helping to push up profit.

Demand going forward

Of course, a continued reduction in costs will help profit to increase further. In turn, this should allow the share price to continue to rally as earnings per share jump.

Yet there comes a point when costs can’t be cut further without hindering operations. This means AO World also need to work on boosting demand. When I look at the business, I think this is achievable.

The firm is positioning for annual revenue growth in a corridor of 10-20% for the next year. Looking forward, AO World said that “our addressable market in the UK is significant as it currently stands at £27.6bn”.

When I consider that revenue for the business has been around £1bn-1.6bn for the past few years, it’s clear that the scope for higher income is definitely there.

The main risk I see is that the market in the UK is competitive and the company’s moat is shallow. Aside from price and product offering, there’s little to differentiate retailers like AO World from its sector peers.

Under the radar

With a strong customer base of 11.6m, a strong online presence and profits, I think the business can push on for 2024. It isn’t paying a dividend, which I think is wise. Like other growth stocks, the retained earnings can be pushed back into the business, helping to fuel further growth.

I’m thinking about investing now. Even though the stock has jumped already, I think that the firm isn’t in the spotlight. When it starts to get more mainstream traction, the stock could push on higher.

The post This FTSE 250 growth stock is up 65% and showing no signs of stopping appeared first on The Motley Fool UK.

Out of favour

Tritax Eurobox (LSE: EBOX) is one example of such a penny stock I’d consider buying today. If the name rings a bell, it’s probably because the FTSE 250 is home to its UK-focused big brother Tritax Big Box.

Essentially, both companies do the same thing, namely own and manage logistics real estate — warehouses and distribution centres — for clients such as retailers. As its name suggests, Eurobox does this on the continent.

Given what’s happened to property values in general over the last year or so, it probably won’t surprise anyone to learn that this investment trust’s share price has been in the doldrums. Galloping interest rates were never going to go down well with the market.

However, I think the tide could be turning.

Huge dividends

Eurobox has climbed over 20% in value in the last month alone. This is clearly a result of the Bank of England’s decision to maintain rather than increase interest rates. Investors will surely be hoping that this pause is followed by a decision to cut at some point in 2024.

Naturally, no one can predict when this will happen. But Fools like me aren’t concerned with trying to time things precisely. The goal is to find stocks with great growth potential, buy when they’re cheap, and hold them for years.

Speaking of which, Eurobox trades for a little less than 11 times FY24 earnings. That looks reasonable to me, especially as the shares come with a monster 8.2% dividend yield.

Profit upgrade

If that’s a penny stock I’d consider buying, online electrical retailer AO World (LSE: AO) is one I’m happy to push away with a bargepole.

That might sound like an odd thing to say. The shares are up over 50% in 2023, so far. The company also recently raised its guidance on annual pre-tax profit to between £28m and £33m. The previous estimate was £28m on the dot.

On top of this, I appreciate the shares multi-bagged during the pandemic as everyone shopped for gadgets and white goods from home.

Where’s the moat?

The problem is that I still struggle to see how AO World can possibly deliver the gains I would want for the risks I’d be taking. This is, and I suspect always will be, a low-margin business operating in a cut-throat sector. If it had a competitive advantage over rivals, surely that would have become apparent in its nine years as a listed company.

The pandemic was also an extraordinary period that’s unlikely to be repeated anytime soon (we hope!). Tellingly, the price has now returned to where it once was. It also barely budged in response to the aforementioned profit upgrade.

This suggests to me that the valuation of 23 times forecast FY24 earnings is already (very) rich. A pullback could be on the way. And if that happens, there won’t be any dividend stream to compensate.

The post These penny stocks are flying, but I’d only buy one of them now appeared first on The Motley Fool UK.

But the shares have soared lately, almost doubling from their August lows. Positive news released this morning sent the shares up in early trading. Given the upward momentum of the stock in the past few months, might it have turned a corner? If so, ought I to add it to my portfolio?

Business challenges

As an online retailer, AO World saw sales boom during the pandemic. Revenue in its financial year ended in March 2021 was 62% higher than the prior year. Post-tax profits soared over 2,400% to £17m. Last year, however, things came down with a bump. Revenue fell, although it was still around 50% bigger than before the pandemic. The company crashed to a post-tax loss of £30m.

With recession biting, white goods sales could fall. That risks further slides in revenue for AO World, with a risk to profitability. I think that explains why the shares fell to the sorts of prices we saw over the summer.

Investor confidence seems to have increased since then however. I reckon today’s trading announcement could boost it further. The company said that revenue for the first nine months of its financial year was in line with its expectations, despite falling 17% compared to the equivalent prior year period.

The company said today it is “cautiously optimistic” and expects adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £30m-£40m, an upgrade from its most recent guidance issued less than two months ago.

Strategic choices

Ultimately as an investor, I prefer a company to make bigger profits on smaller revenues than the other way around. The firm’s decision to slim down its business to try and improve profitability – for example by closing its German business – appears to be yielding results.

However, as an investor, I pay little attention to EBITDA as an earnings measure. Interest and tax are real cash costs that businesses face. So I will be looking to see whether the company can successfully boost its basic earnings this year, hopefully turning a profit again.

Can the shares keep rising?

If the company can indeed prove its revised strategy is helping profitability then I think the AO World share price could keep rising. Despite almost doubling in a matter of months, I think the company could justify a higher valuation if it proves that its business model can be more profitable.

Although a recession could hurt sales, long-term demand for white goods should be strong. AO World benefits from a large customer base and well-regarded brand. I think the shares have turned a corner in recent months. I would be surprised to see them fall back to their summer lows if the current business momentum continues.

For now though, I will not be adding the company to my portfolio. Its business performance has been uneven. I still see AO World as a recovery story. I will wait for more evidence of sustained profitability before considering whether to buy the shares.

The post Up almost 100%! Has the AO World share price turned a corner? appeared first on The Motley Fool UK.

That pain could come in November.

Howdens Joinery

One FTSE stock that could have a difficult month is kitchen supplier Howdens Joinery (LSE: HWDN).

Now, I’m actually a fan of this company. It’s a big player in its market and has a history of generating above-average returns on the money it puts to work.

Unfortunately, it’s easy to overlook these qualities in the current climate. With inflation running high and a housing market now treading water, demand must surely have softened over the summer. We’ll find out when it reports on recent trading on 3 November.

The question is, how much of this is already priced in? Well, the near-halving of Howden’s share price in 2022 would suggest quite a bit. Interestingly, there also seems little interest from short sellers as things stand. This suggests that expectations might actually match reality. If so, there’s no guarantee that we will see another drop next month.

That said, I’m prepared to wait for the numbers before deciding whether to strike.

Marks and Spencer

Interim results from Marks and Spencer (LSE: MKS) will be published on 9 November. Like Howdens, its stock has tanked in value year-to-date.

I can’t say I’m surprised. Having almost overcome the challenge of shaking its tired image, the tightening of purse strings is another hurdle for the business. News that inflation returned to double-digits in September is hardly an encouraging development. A recent update from Ocado (its joint venture partner in the UK), and the reaction to it, don’t bode well either.

On the flip side, the shares look cheap, changing hands at a price-to-earnings (P/E) ratio of a little less than seven. One might also argue that M&S stands to benefit from fewer people eating out but perhaps spending a little more on eating in. And, no, I don’t believe every M&S shopper has suddenly migrated to shopping at a German discounter for their groceries.

Even so, I can’t see a catalyst for a recovery to begin in November. For this reason, I’m happy to watch from the sidelines.

AO World

Down 57%, as I type, electrical goods seller AO World (LSE: AO) has been another big casualty in 2022.

With interim results out on 22 November, I just can’t see how management has been able to turn this still-not-consistently-profitable business around. Like M&S, AO operates in a hyper-competitive environment. And while white goods and gadgets need to be replaced from time to time, many people will avoid doing so in a recessionary environment unless completely necessary.

It seems I’m not alone in being bearish. Broker Canaccord Genuity currently has a ‘sell’ rating on the stock with a target price of just 31p. It’s currently 45p.

Management is clearly trying. The decision to leave the German market and concentrate on the UK, while overdue, does make a lot of sense.

Even so, I still can’t see the attraction of me investing here. They don’t make bargepoles long enough.

The post These FTSE stocks might crash again in November appeared first on The Motley Fool UK.

But AO World has carved out a sizeable business in the digital retail space, an area I expect to grow more in future. Could its dramatic share price fall offer a buying opportunity for my portfolio?

Stuttering performance

AO World saw revenues shrink 6% last year. But they were still more than 50% larger than they had been two years previously. That suggests the company has been able to hold onto a lot of the sales gains it saw during lockdowns.

More alarmingly though, the company swung from a £20m profit the prior year to a £37m loss in its most recent 12-month reporting period. Looking ahead, the company’s chief executive said: “We certainly have more volatility to navigate.”

Reasons for optimism

Most of that sounds unreassuring. Sales are falling, the company has swung sharply into the red and we are now in a recession. This is where consumers may decide to postpone or scrap the purchase of white goods that cost hundreds and sometimes even thousands of pounds. That could hurt AO World’s sales further. If sales fall but costs do not come down at the same speed, it might also be bad news for profit margins.

However, I see grounds for optimism when it comes to the company’s future. While some white goods purchases are discretionary, a lot are not. If people move into a new home without a washing machine, for example, I think most will choose to buy one.

AO World has built a strong position in this market. It has boosted its liquidity by issuing more shares over the summer. The company is also leaving the German market. Whether or not that is the right decision from a long-term strategic perspective, I do think the move makes sense now.

AO World is battening down the hatches due to an economic storm. I think focussing on its key UK market is smart. It can always try to expand internationally again once the economy is stronger.

My move on AO World

I have confidence in the company’s management, which has done a great job building the business in recent years. If the firm rides out the recession and continues to build a strong position in the UK market for white goods purchases, I think the current AO World share price could come to look like a bargain.

But although I am optimistic, I think the risks are sizeable. The company has a limited track record of profitability. It operates in a highly competitive market. It may need to boost liquidity further if it keeps racking up losses, which could lead to more shareholder dilution.

Looking first at risks rather than potential rewards, I realise that I can invest in other retailers I think face less sizeable challenges. So I do not plan to buy AO World shares for my portfolio.

The post The AO World share price is in pennies. Should I start buying? appeared first on The Motley Fool UK.

AO shares fall

As a quick reminder, AO is a retail business specialising in electrical goods and appliances for consumers’ homes. It operates in the UK and Germany. Its business model involves picking and packing goods consumers buy, before delivering them through its own delivery business as well as other partners.

So what’s happening with AO shares currently? Well, as I write, they’re trading for 43p. It is worth remembering a penny stock is one that trades for less than £1. At this time last year, the stock was trading for 212p, which is a 79% decline over a 12-month period.

Pandemic spending boosted AO shares, however since the turn of the year, macroeconomic factors have negatively affected operations and profit margins. Furthermore, recent events within the business have not helped either.

Recent events and refocused strategy

Two weeks ago, AO shares suffered once more when the firm announced it needed to raise £40m to shore up its financial position. This is rarely a positive sign so I understand why the shares fell further. It will raise the funds by selling new shares at 43p per share.

AO has confirmed the funds will be used to maintain its credit rating, which is important, as this allows it to sell stock before it needs to pay its suppliers. Furthermore, it has decided to close its troubled German operations too. Next, it has decided to venture into new product lines and discontinue others as the new strategy begins to take shape. A major aspect of the new strategy is to cut costs, which should help boost its balance sheet and improve its chances of sustained profitability.

I do understand that AO’s past performance is not a guarantee of the future, but I wanted to know a bit more before reviewing its new strategy and deciding whether to buy shares in the penny stock. I noted that it has only reported a profit in four of 11 years as a listed company. In a saturated market, it seems competitors are getting the better of AO.

A penny stock I’m avoiding

There is every chance that this cash injection, and the new initiatives to cut costs and boost growth, could reap rewards for AO. But current macroeconomic headwinds will not help. Nor will the current well-documented cost-of-living crisis here in the UK, which could result in consumers spending less on electronic goods.

I did note that full-year results for the year ending 31 March 2022 have been delayed due to the recent review. I’ve decided to keep AO on my watch list for now. There are too many uncertainties putting me off. There are better stocks out there with better fundamentals and better prospects of consistent and stable returns that I prefer.

The post Could a potential recovery make this falling penny stock an exciting opportunity? appeared first on The Motley Fool UK.

Tullow Oil

Tullow Oil’s (LSE:TLW) share price has fallen 19.68% in the last year, while it’s down 20% in the past month. The shares are currently trading at 44p.

The company – an oil exploration and production firm – recently concluded a deal to buy Capricorn Energy. The new partnership, which started in June, is designed to create a “leading African energy company”. 

Investment bank JP Morgan hailed the deal as a step in the right direction. It further believes that the partnership will be beneficial for both oil production and reserves. The bank placed a price target of 82p on Tullow Oil, which is far higher than the current share price.  

The present economic environment is also good news for the business, because both WTI and Brent Crude oil are still trading around $100 per barrel. This essentially means that Tullow Oil’s produce is worth more than it would have been in 2020, for example.

However, between 2020 and 2021, revenue fell by around $100m. This trend is something I’d like to see reverse when the next results are published.

AO World

Secondly, AO World (LSE:AO) shares have taken a battering over the past year. In that time, they’ve fallen 81.42%, while over the last month they’re down 40%. At the time of writing, the shares are trading at 45.5p.

The company – a retailer of electrical goods – announced last month that it was embarking on a £40m capital raise through the issuance of new shares. This sent alarm bells ringing in the stock market, because investors interpreted this as a sign that the firm was struggling for cash.

The business stated that it was raising cash to bolster liquidity and to be able to take advantage of any future opportunities to grow.

In terms of results, AO World performed relatively well during the pandemic. Between the 2020 and 2021 fiscal years, pre-tax profits grew from £600k to £20.2m. 

However, with more talk of a recession looming, it seems likely that revenue could be hit as customers have less cash in their pockets to spend on electrical goods. This could be bad news for the shares.

Overall, both of these companies have faced challenges recently. It’s still unclear how broader factors, like Tullow Oil’s takeover deal or AO World’s capital raise, will impact the respective businesses. Given the uncertainty, I won’t be adding these stocks to my portfolio, but I’ll keep them on my watchlist for the future.

The post Should I buy or avoid these 2 growth stocks? appeared first on The Motley Fool UK.