Saturday, 5 August 2017

Results are what counts - Once Again; Next Plc (NXT)

Next is my largest equity holding at the moment at 8% of my fund and the stock saw a significant pop this week following the publication of the August trading statement. I remain bullish on Next shares and think they offer the best value proposition in the FTSE 100 at this point. The stock rose around 8% off the back of the announcement due to better than expected sales following warm weather in the UK in Q2:

Next Trading Statement
Notice that Next directory saw 7.4% YTD sales growth and the stores a 7.7% decline. So 'bricks and mortar' is not doing so well but this long standing secular trend is something Next is extremely well positioned in having taken the Directory online years ago. Not only that but Next managed to make a huge profit and excellent cash flow running that business - unlike ASOS plc - (although yes overall top line growth is less exciting).

Next narrowed their lower bound sales guidance by 50bps and maintained their profit forecast guidance. The stock rallied because things arent getting any worse. This is a significant bottoming reaction to news - this and the May trading statements have seen a reversal of expectations after January's awful statement - which initially caused me to first start acquiring the stock.

Is the 18 month bear market in Next shares ending? Well I am a fundamentals guy but technicals give you an idea about whether you are stuck in a value trap - now I understand its a bullish move when you break the 200 day moving average and the 50 day in a nice gap up. Could this be the end of the wider downtrend?

Regardless the healthy dividends continue and cash flow generation is just fantastic;

Next Trading Statement
More dividends, excellent free cash flow levels - just short on the growth front (hence the high divs and low valuation). Time will tell. I continue to maintain my personal bullish view on Next shares. 

I notice also, although it is early days, that Next has performed very well especially against the value trap that is Debenhams since my initial inquiries into the sector in March:

As the graph shows Next +13%, ASOS +2%, FTSE +2% and Debenhams down 22%. I maintain my view that within 2-5 years Debenhams will no longer exist - which will come about from first a dividend cut smashing the share pire and then a squeeze from lenders - the pension scheme will end up another minor scandal.

Disclosure: I have established a modest long position in NXT. I have no positions in ASC or DEB. These are opinions only, not investment advice. If in doubt read my disclaimer.

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