Tuesday, 4 April 2017

Why business performance and investment performance differ; ASOS Plc (ASC)

The news tells us what has just happened. Stock prices tend to discount the future. 

It is noteworthy today that ASOS published their half year results. The numbers were excellent with top line growth above 30% driven by international sales and the weak pound. These positive results were widely reported by the media showing UK export growth. But the stock fell as much as 5% this morning (down ~3% now).

Just a few weeks ago Next published weak results - these were reported with doom and gloom the media - but the stock price popped 8% on the day. 

The difference being; 'Price is what you pay, value is what you get' - Warren Buffet

At present the lofty price of ASOS means any let up in the growth rate is punished by the market as the stock is pricing in huge growth and future capital gains. The results were strong top line but earnings growth was only around 15% indicating that most of the top line growth is creating value for others (distributors principally) rather than shareholders of ASOS. ASOS posted further deteriorating margins. A 15% earnings growth rate does not justify a 138x P/E ratio. 

Note this key piece of the income statement:

ASOS Plc Interim Results
ASOS operating income grew just 13% with revenue growth at 37%! The operating margin collapsed from 3.57% to just 2.97%. That is a very big shift downward given the very thin margins. ASOS grows but it grows less and less profitable.

Next on the other hand popped up after posting weak results because management did not guide down the full year profit estimate any further following the January trading statement. 

Reading the news media it seems easy to pick investments - it is clear that ASOS is growing faster than Next. But the price you pay for the prospects of the business ultimately determines the investment return. Both Next and ASOS are good businesses but one offers value beaten down by poor expectations and the other offers growth bid up to the sky by lofty expectations.

Time will tell whether ASOS does meet those expectations and outperform Next going forward. These results seem to confirm my thesis that Next is undervalued and ASOS overvalued. 

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