Would you pay a higher price for less return?

Would you pay a higher price for less return?

10 April 2019 from Anna Svahn

Would you rather buy a company today with lower profits at a higher price than a company with higher profits at a lower price? Hennes & Mauritz report for the first quarter of 2019 came in over expectations and the share price rose from SEK 140 on March 28th  to today's SEK 163. That the company hit expectations is of course positive, but would have been more so if it were not that expectations were that they would deliver their worst result since 2001.

It is not easy to run a retail company that has a turnover of SEK 210 billion (2018), and it is even more difficult to let a company in this size grow by 10-15 percent annually in local currency. H&M thus has high goals despite expectations being low, and with the result in hand, the result has fallen every year since 2015, despite the fact that sales have increased (albeit much less than the company's forecasts). How is it that we want to pay more today than a few months ago for a company that continues to report lower profits? Why investors are attracted by a company that distributes more money than they have when the low result shows rather a negative trend than an individual bad quarter or year.

As mentioned, it is not easy to run a company that has a turnover of SEK 210 billion. However, it is all the easier to analyze the same company. So let's do a current analysis of H&M:

It was long ago H&M grew by 10-15 percent in local currency. Last time was 2015 when H&M increased net sales from SEK 151 billion to SEK 180 billion. Since then, sales growth has been between 3-6 percent while at the same time having problems with their margins, which has gone from 59.1 percent in 2013 to 2018 in 52.7 percent. This has led to the result falling from SEK 20.9 billion in 2015 to last year's SEK 12.6 billion.

It is therefore not surprising that the share price has gone from top levels of SEK 368 in 2015 to a bottom of SEK 117 during last year. The question, however, is whether it is reasonable for the course after it to climb back to today's levels of SEK 167. Although the valuation multiples are slightly lower today than they were when H&M still grew by over 15 percent annually and at the same time had control over their margins, one can question whether P / E 18-22 is what one wants to pay for a company with falling profits.

But okay, point out that you actually want to pay somewhere between P / E 18-22 for a company with falling profits. What would the stock price then stand for if earnings per share for full-year 2019 land between 5-7 SEK (7.64 for 2018)? That would mean that we end up in an interval between SEK 90-154.

Do you really want to pay SEK 167 today for a company that with the same multiples is worth less tomorrow? Do you also want to pay so much for a company today that faces more - known and unknown - future challenges? Do you consider the risk based on where we are in the business cycle Consider when you analyze H&M how the forecast looks and whether you want to set higher or lower multiples than today. If H & M's actual earnings per share turn out to be SEK 6 for 2019, this means that H&M will be traded at a P / E ratio of over 27. Is it reasonable for a company in a competitive industry that is undergoing a major change?


@Anna Svahn


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This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

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05/12/2022 05:37:22


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