Shares in high street fashion chain Next (LSE: NXT) rose by more than 3% this morning, after the group reported a 1.8% rise in sales during the six months to 30 July.
The firm’s first quarter trading update in May showed that sales fell by 0.9% during the first quarter, so today’s positive figure was a relief for investors. However, it’s clear that the market is still challenging. Full price sales are down by 0.3% so far this year, due to weaker high street activity.
Discussing the EU referendum, Next said that so far there’s no evidence of a change in consumer behaviour. However, the weaker pound means that the group’s purchasing costs from Asian manufacturers are likely to rise by up to 5% next year.
As usual, Next provided detailed profit guidance for the remainder of the year. Group pre-tax profit is expected to be within a range of £775m-£845m this year. That’s an improvement on May’s guidance of £748m-£852m, as the lower limit is £27m higher than it was at the end of Q1.
Earnings per share are expected to be between 2.5% lower and 6.3% higher than last year. This suggests a range of 430p to 469p per share, which is slightly ahead of analysts’ forecasts of 433p per share.
Based on these figures, Next shares currently trade on a forecast P/E of about 12.5. That seems reasonable value to me, especially as the group is expected to pay total dividends of 203p this year, giving a 3.8% yield. Next remains a buy, in my view.
Mining outlook “volatile”
The new chief executive of Rio Tinto (LSE: RIO), Jean-Sébastien Jacques, said this morning that the mining market remained “uncertain and volatile”.
During the first half of 2016, Rio generated operating cash flow of $3,240m, down by 27% from $4,435m during the same period last year. Underlying earnings per share fell by 45% to $0.87.
However, the group reported a further $600m in sustainable cost savings and generated free cash flow of $2bn. As a result, net debt fell by $800m to $12,904m.
Rio will pay an interim dividend of 45 US cents per share and confirmed plans for a total payout of no less than 110 cents per share for 2016. That’s consistent with City forecasts and equates to a yield of about 3.4%.
As a long-term shareholder in Rio, I’ve grown used to the volatility of the firm’s shares. In my view, the firm’s long-term and low-cost assets make it an excellent income stock. Today’s results show why. Rio’s EBITDA profit margin — earnings before interest, tax, depreciation and amortisation — was 33%. The group’s iron ore division reported an EBITDA margin of 58% and generated $1,332m of free cash flow, despite very low iron ore prices.
Is Rio still a buy?
Rio shares have risen by 17% since the EU referendum. The group’s reporting currency is the US dollar, so the pound’s weakness against the dollar has boosted the value of the firm’s UK-listed stock.
Despite this, I’d argue that at around 2,400p, Rio Tinto shares remain reasonably good value for long-term investors. The group is robustly profitable at current commodity prices and the dividend yield is attractive and should be comfortably covered by earnings.