Is It Time To Sell Or Buy Associated British Foods plc, Whitbread plc & ASOS Plc?

The valuation of Associated British Foods (LSE: ABF) has been boosted by Goldman Sachs on Friday, so the obvious question now is whether this would be a great time to take profit after its prolonged weakness. Elsewhere, you may also be tempted to cash in on Whitbread (LSE:WTB) and ASOS (LSE: ASC)…

Here are a few things you should consider before pulling the trigger, however. 

Associated British Foods

Associated British Foods is up 2.4% at the time of writing as Goldman Sachs upped ABF’s target price to 3,120p. ABF currently trades at about 3,000p a share (the average price target from brokers stands at 3,075p), which implies 2015 multiples of 36x for earnings and 16x for adjusted operating cash flow, respectively, falling to 28x and 14.5x in 2016.

On the face of it, ABF is not particularly cheap, but it could belong to a diversified portfolio — this is partly a bet on the possible divestment of its sugar assets. Operating margins are expected to rise until the end of 2017 on the back of rising revenues, which should grow by about 20% over the period, greatly outperforming ABF’s trailing performance. What a forward yield ranging between 1.2% and 1.4% means is that ABF remains a fully fledged play on organic retail growth. 

Whitbread

Whitbread has been trading around its current level of 5,185p a share since mid-February, but is up almost 10% in 2015. It’s less expensive than ABF, with net earnings multiples in the region of 20x for the next couple of years — its cash flow multiples point to a 20% discount versus ABF. 

Its new chief executive, Alison Brittain — who is set to start in early 2016 — has been recently defined by The Guardian as “one of the most powerful women in the City.” 

Given her background in retail banking, she was not an obvious choice, the newspaper noted — yet maybe she is a more obvious choice that many had thought, I’d argue.

It doesn’t look like Whitbread needs a lot of work to be done, to be honest — at least operationally. However, once led by a banker — albeit “just a retail banker,” one banking source pointed out — Whitbread could entertain extraordinary corporate activity such as spin-offs, which have long been rumoured and could help it released shareholder value.

Its balance sheet is strong, but its core margins are not expected to rise as fast as those of ABF. 

ASOS

ASOS is not an easy company to value, but as you might know, it could be a calculated bet in the mid-30s.

As you might also know, though, is that as ASOS continues to grow, falling operating margins may disappoint investors in future, which could sink the stock in a flash, just as it happened in the recent past. 

Trading multiples are almost prohibitive: based on net earnings for 2016 and 2017, ASOS trades at 85x and 70x, respectively. 

That’s not unusual for high-growth businesses, but to justify such a lofty valuation you must believe that revenues will almost double to £1.7bn in 2017, allowing ASOS to report net earnings of about £70m, assuming a steady net income margin at 4.1% over the period.

If that’s the case, ASOS may even start to pay a dividend by 2017.