It’s fair to say that most listed retailers (and their investors) won’t have particularly fond memories of 2018. Huge share prices falls in companies such as Debenhams, Mothercare, Footasylum, and Quiz demonstrate just how savage the market can be if numbers fail to impress.
For this reason, holders of high street clothing giant Next (LSE: NXT) can consider themselves rather fortunate. Compared to the aforementioned laggards, the Simon Wolfson-led company has done rather well with shares 19% higher than at the start of the year, before this morning’s brief trading update was released. That said, I remain fairly apathetic towards the stock.
Mixed bag
As predicted by the FTSE 100 constituent, full-price sales were 2% higher over the third quarter to 27 October on that achieved last year.
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The company’s online operations continue to do well, with sales rising 12.7% in the three months, and just under 15% in the year to date.
In contrast, however, sales at physical stores remain a drag on performance, falling by 8% over the reporting period. When combined with the first two quarters of the year, that brings retail sales down 6.3% in 2018, going some way to explaining why the stock fell in early trading.
Despite this mixed performance, the company elected to maintain its guidance on sales and profit for the full year, as revealed alongside its interim results back in September. Full-price sales are expected to be 3% higher in 2018/19 than in the previous financial year, with pre-tax profit and earnings per share increasing by 1% (£727m) and 5%, respectively. Clearly, a lot will hinge on how the company performs in the run-up to Christmas. An update on trading for the festive period is due on 3 January.
With analysts predicting tepid earnings growth next year, however, the question remains as to whether the shares are worth buying.
On a price-to-earnings (P/E) ratio of 12, Next’s shares are neither ludicrously overpriced nor screamingly cheap. A cash return of a little under 165p in the next financial year equates to a yield of 3.1% — not bad, but hardly the stuff of dreams for income-focused investors.
As far as firms on the high street go, Next looks more resilient than most. As an investment at the current time, it looks decidedly average in my opinion.
Income and growth
Its business may be a million miles away from the high street but, for me, defence juggernaut BAE Systems (LSE: BA) represents a better pick at the current time.
A fall of roughly 23% from the all-time highs reached in the summer means leaves the shares on a similar valuation to Next, and great value relative to other firms in its industry. Forecast earnings growth of 9% next year leaves the stock on a PEG ratio of 1.3, meaning that investors will be getting far more bang for their buck, compared to the 3.5 predicted for BAE’s top tier peer (n.b. the lower the PEG, the better).
Income investors also get a better deal with the £16bn-cap expected to yield just over 4.6% next year, based on the current share price. While dividend growth is nothing to get excited about, it is nevertheless consistent, with a near-4% hike expected next year on payouts that are likely to be covered twice by profits.
With political tensions remaining high and defence budgets rising, I maintain that BAE is a great pick for most ‘buy and hold’ investors.
