My Motley Fool colleague Edward Sheldon pointed out that the shares of fashion retailer Boohoo (LSE: BOO) have recently broken out of a period of consolidation lasting just over two years. He sees that as bullish, and so do I.
Although it’s a great idea to pick shares according to your analysis of a company’s fundamentals and business prospects, we can learn a lot about the sentiment surrounding a stock by studying the share price chart.
However, I reckon we should approach with care because, at first glance, Boohoo’s valuation looks high. With the shares at 334p as I write, the forward-looking earnings multiple for the trading year to February 2021 is around 50.
A bullish outlook
But that’s not putting some investors off this remarkable growth proposition. Today’s bullish trading update for the four months ended 31 December 2019 has led to more buying and the share price is up around 5% — well above the previous high set in November.
There’s no mistaking the message in today’s report, which leads with the headline, “Continued strong growth across all brands in all regions.” Overall revenue at constant currency exchange rates grew by 44% in the period year-on-year, which strikes me as a cracking rate of expansion. Boohoo has really captured the market, it seems.
Will this greyhound ever run out of puff? Of course, it will in the end. Most companies see their rates of growth decline as they become larger enterprises. But the directors have upgraded guidance for the current trading year to 29 February and now expect full-year revenue to grow by between 40% and 42%, up from a previous top-end estimate of 38%.
They reckon in the medium term that sales will likely grow by 25% per year with an annual increase in EBITDA (earnings) of around 10%. That’s all right, isn’t it? If Boohoo can put in several more years of profitable growth around those levels, perhaps the current valuation is justifiable?
Executing well
Meanwhile, the balance sheet looks strong with net cash of £245m at the end of the period, up from £207m just four months earlier. That suggests to me that the firm’s cash performance has been decent too. This really is a success story. I wish my shareholdings had underlying businesses performing like this one!
I thought in October that Boohoo looks like a company executing well and getting the basics right. Chief executive John Lyttle said in today’s report the newly-acquired brands, MissPap, Karen Millen and Coast, are showing “great promise” and he pointed out they open different target markets for the company. The prospects for the business look rosy to me, and my guess is the shares will move higher still in 2020, despite the rich valuation. But high valuations come with risk, and whether you buy the shares now or not is your call.