The fall in Next’s share price this year has been truly startling, this for a company committed to support that share price by means of almost £300 million of share buybacks this financial year. Next has always been assiduous in keeping the market up to date with trends and has been sounding quite gloomy on several occasions this year, so there is always the suspicion that it is being punished for such openness.
The shares rose 169p to £49.79 yesterday amid a sense of relief that the third-quarter trading update was not significantly worse. Total sales in the quarter off by 3.5 per cent reflected a very strong performance the previous year, when Next enjoyed a combination of favourable weather, for a change, and the right mix of transitional merchandise from the summer to the autumn.
The comparisons will get more favourable as the year progresses. There was only a 0.4 per cent rise in the fourth quarter last time. Next does not give like-for-like sales and tends not to open new stores, preferring to switch existing branches to bigger premises where possible. The analysts reckon that those like-for-likes were probably down by about 8 per cent for the year to date.
At the present price, there is no prospect of further special payments to shareholders, it being more cost-effective to buy back the shares. They have been hammered by the expectation that the fall in the value of the pound will require the company to raise prices in the spring. Next has always said that it can limit those prices rises to only 5 per cent or so, while it thinks that actual lost sales will not be that great.
The market does not entirely believe it and has been marking down the retailers generally, reasoning that anyone who has to source from outside the UK will be hit, while consumer spending may come under pressure as and when inflation starts to rise again.
That seems too gloomy a view. In general Next has managed to outperform its peers and, by dint of widespread cost-cutting, has managed to keep profit forecasts for the current year about where they were.
The shares sell on 11 times’ earnings and yield in excess of 6 per cent. On that basis, unless you take a very gloomy view of the high street, that fall looks overdone.
My advice Buy
Why Shares have fallen a long way for what is a well managed business with the support of a shares buyback programme
OneSavings Bank
Like the other newish banks trying to break into the British market, shares in OneSavings Bank suffered in the wake of the referendum on the assumption that a weakening UK economy and continuing low interest rates would make that task harder. They had almost recovered when they lost another 13¾p to 278p yesterday after some respectable enough third-quarter figures.
OneSavings, which specialises in loans such as for buy-to-let properties or commercial premises, is concentrated in the southeast, another cause for concern to some. Its loan book grew 13 per cent in the nine months to the end of September to £5.6 billion and can be expected to top £6 billion by the year’s end, in keeping with plans for double-digit growth into next year.
That specialisation means that the return on equity is somewhat higher than elsewhere in the sector. It also means that the shares trade on a pretty hefty premium to the expected tangible asset value. The business model is an attractive one and the shares are trading at well above their June 2014 float price of 170p, but that high valuation suggests immediate progress may be limited.
My advice Avoid
Why Bank is in a strong market but valuation is high
Just Eat
Just Eat was the subject of a couple of favourable brokers’ notes at the end of last week ahead of its third-quarter figures. The shares had been falling since August amid fears that the unseasonally warm weather would hit sales of takeaway food, and both notes took the view that the falls had been overdone.
The shares have benefited, too, from the Uber ruling, which presumably will put up costs at a competitor. In addition, an American investor has raised its stake to above 5 per cent. So, predictably, as those third-quarter figures arrived in line with market expectations, they fell by a further 1p to 560p.
Total orders in the third quarter were ahead by 34 per cent, or by 38 per cent on a like-for-like basis in the year to date. That strong growth rate goes some way to justify the sky-high rating on which the shares trade, about 50 times’ this year’s earning. The growth will be coming from its overseas operations; some areas such as France, Ireland and the Nordic countries are already in profit.
The Benelux business, where Just Eat was stuck in the No 2 position in that market and unable to buy its bigger competitor, has now been sold. Mexico, Italy, Spain and Canada are still soaking up investment but will come around in due course.
The company has nudged up its revenue and profit estimates for the current year, which is encouraging. The problem is that high multiple, which appears to have much of that growth built in.
My advice Avoid
Why Shares change hands on a very high multiple
And finally . . .
Abcam is one of those businesses that finds itself, by accident or design, in exactly the right place in its chosen market. The company, which is not that well understood and with few obvious comparators, has achieved almost non-stop growth by providing big pharmaceuticals companies with essential research. The annual meeting heard in a statement light on detail that the financial year has started well, paving the way for further strong growth after results last month showed total revenues up almost 20 per cent.
