Better shop in Zara or Next?
2014 first half has been a difficult year for stock
investors as the board market has been flattish and money has to be made by
stock picking. Stock picking is as hard as
England getting into quarter final in the World Cup. UK FTSE100 index has gone up by just 1.1%
year to date as of 21 May, 2014. The 5
best performing stocks have all gone up by more than 20% and they are United Utilities,
AstraZeneca, Associated British Foods, Next Plc and RSA Insurance. The worst 4 have gone down by over 20% and
they are Rolls-Royce, WM Morrison, Coca-Cola Hellenic Bottling Company and ARM
Holdings that designs chips for mobiles.
Europe wise, Eurostoxx 50 is up 2.5% year to date
with Italian banks like Intesa Sanpaolo, Banco Santander and UniCredit in the
top 10 performing stock list while BNP Paribas, Deutsche Bank and AXA in the 10
worst performing stock list. One can say
every dog has its day and the fear for Eurocrisis is fading. Dow Jones is down 0.26%, S&P 500 is up
2.2% and Nasdaq100 is up 1.21% year to date as of 21 May, 2014. Some big names like Yahoo!, Amazon.com, Coach,
Whole Foods Market are down 15%, 24%, 26% and 35% respectively.
Let’s talk about some business we can touch and
feel. Looking at the retail sector in
Europe and zooming into 2 companies, Next Plc is at GBP 10.3 billion market capitalization
(how much one needs to buy every Next Plc share in the market) and Inditex,
which runs Zara, is GBP 52.7 billion market capitalization. To give the readers more reference points,
GAP is GBP 10.7 billion and Esprit is GBP 1.7 billion. (Data are as of 21 May, 2014.)
Citi Bank analyst cut Inditex 2015 estimated
earnings by 5% to EUR 3.2 billion (which is still a lot of money). He sees first quarter sales up by 5% but
margin down by 1% due to negative foreign currency impact (cost in EUR and
revenue in other currencies such as USD and JPY). Inditex share underperforms Stoxx Europe 600
Retail Index by 10% (an index consists of 600 retail companies in Europe) this
year. Its share price was as high as EUR
121.8 on 30 October, 2013 and was still at similar level in January 2015. Since
then, the stock has corrected 15%.
Inditex with its Zara chain has been the darling for fund managers in the past 5 years. Since 2010, Inditex stock price has more than doubled from below EUR 50 to EUR 104.355 as of 21 May, 2014. The stock had an amazing run in 2012 when the stock was in the EUR 50 to EUR 70 range in the first half of the year and it reached EUR 100 before yearend. Most of the gain came from expectation of high growth which in technical jargon is called expansion in price earnings ratio (share price as a multiple of one year earnings). Its share price was trading at 20 to 22 times earnings and expanded to 28 to 30 times earnings in 2012. 2013 was a similar story with price earnings ratio expanded to 31 times at the peak. As of 21 May, Inditex share price is EUR 104.35 and at 27.3 times earnings. It is important to understand the concept of price earnings ratios as investors could often choose the right company but if they pay too much for it, they may not see any profit from the investment. Remember your friends who bought their dream holiday house in Portugal in 2007, the prices are very likely to be much lower today.
Inditex with its Zara chain has been the darling for fund managers in the past 5 years. Since 2010, Inditex stock price has more than doubled from below EUR 50 to EUR 104.355 as of 21 May, 2014. The stock had an amazing run in 2012 when the stock was in the EUR 50 to EUR 70 range in the first half of the year and it reached EUR 100 before yearend. Most of the gain came from expectation of high growth which in technical jargon is called expansion in price earnings ratio (share price as a multiple of one year earnings). Its share price was trading at 20 to 22 times earnings and expanded to 28 to 30 times earnings in 2012. 2013 was a similar story with price earnings ratio expanded to 31 times at the peak. As of 21 May, Inditex share price is EUR 104.35 and at 27.3 times earnings. It is important to understand the concept of price earnings ratios as investors could often choose the right company but if they pay too much for it, they may not see any profit from the investment. Remember your friends who bought their dream holiday house in Portugal in 2007, the prices are very likely to be much lower today.
Next Plc share price has been climbing up since
2011, from GBp 2500 level to the current GBp 6600 level. Its price earnings ratio has also improved
from 8.7 times in March 2011 to 18.6 times in February 2014. Next Plc share price enjoyed a nice jump from
GBp 5500 a share to GBp 6000 in January 2014 moved up steadily to GBp 6960 on
26 March, 2014. In April and May, the
stock corrected 5% and closed at GBp 6615 on 21 May, 2014. Between Inditex and Next Plc, it is a choice
between an established global leader and a great local brand expanding
cautiously overseas. The difference in
price earnings ratio also reflects the premium one has to pay for a leading global
business. China economy is slowing,
India has a new Prime Minister, Brazil is busy with the World Cup and Russia has
Ukraine as top agenda. Growth in
developed markets like Europe, US and Japan will need to justify most of Inditex
current price earnings ratio. Winning at
home is perhaps an easier bet.
