Friday, November 16, 2018

Next PLC intrinsic value guesstimate based on Peter Lynch chart

A Peter Lynch chart is not "technical analysis" or "charting" but a visualized form of fundamental analysis (value investing). The first chart is the theory, the Next chart is practice.



Using this Peter Lynch chart of NEXT PLC stock price and a multiple of 15x Earnings per share (P/E = Price / Earnings ratio) you see 2009 was a good time to buy Next (and other stocks), 2010 at 20 GBP was also an opportunity. If you bought shares at 80 GBP, the person who sold to you was making a better decision (in hindsight). 40 GBP in 2017 was also a good price at which to buy. Currently, the shares seem reasonably priced. 

Notes: Next has clear reporting. takes the trouble to try to explain clearly what is going on and where mistakes have been made. They understand the operating leverage you get when you sell more from the same store (they call it "economies of scale"). See:      
Interestingly stores account for less than half of sales, on the other hand, 50% of Online orders are picked up in the stores (I am not sure how that revenue is booked).

Benjamin Graham Defensive Analysis

SECTOR: [PASS]  Next is in retail and neither a technology nor primarily a financial Company, and therefore this methodology is applicable. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Next's sales of GBP 4 100 million, based on 2017 sales, pass this test.

CURRENT RATIO: [FAIL] [PASS]  The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Next's current ratio €179m/€132m of 1.6 just fails the test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Next is GBP 906 million, while the net
current assets are €754 millionNext just fails this test.

LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Next's Earnings per Share have increased 251% in the past ten years.

EARNINGS YIELD: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Next's E/P of 9% (using this year's estimated earnings) passes this test.

Graham Number value: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Next has a Graham number of (15 x GBP 4.5 EPS x 1,5 x GBP 3,3 Book Value) = €18,31 and fails this test.

Note: The Graham Number is low, but Next generates very high returns on its relatively low Book value (ie high Return on Equity) of 100-200% per year and Returns on Assets of 25% a year. So the intrinsic value is much higher than the Graham Number in this case.

DIVIDEND GBP 1.6/51 = 3% and the company is also buying back shares in order to return cpaital to shareholders and increase Earnings per Share.

Conclusion: Next seems like a good buy at this price and I have heard they are hiring hardworking, honest and intelligent people ;) 

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