Is Next’s share price undervalued?
The Next share price (LON: NXT) has performed roughly in line with the FTSE 100 index over the past year. It has risen by 25%, which is a relatively solid performance given the challenging nature of the retail industry.
It means that Next currently has a forward price-earnings of 15.2. On one hand, this could be viewed as excessive given the uncertain future for the UK retail sector. Covid-19 cases have risen to reach above 50,000 per day in recent weeks. When coupled with colder weather conditions that could increase the prevalence of influenza and Covid-19, further containment measures cannot be ruled out. This could be bad news for Next due to the potential for store closures.
In addition, the UK faces the prospect of rising inflation. The Bank of England appears to be backtracking on its view that higher inflation will be temporary and now seems to be preparing investors for higher interest rates. This could dampen the UK’s economic prospects and cause consumer spending levels to be less buoyant than was perhaps considered likely a number of months ago.
However, on the other hand, Next’s share price could be viewed as offering good value for money based on its long-term prospects. The company has expanded its online presence in recent years so that it now generates the majority of its sales from digital avenues. This could position it for long-term growth since the trend towards online shopping and away from in-store buying may continue.
Furthermore, Next has other potential growth catalysts. Notably, its growing international presence is diversifying its operations so that it is becoming less reliant on the UK. Meanwhile, it is benefiting from its retail park locations, where sales levels have generally been stronger than in high street locations in recent years. This could mean that it is less impacted by further lockdown measures, although there is clearly no guarantee that this will be the case.
Next also appears to have an improving balance sheet due it deciding to pay down debt following a significant improvement in financial performance over recent months. As such, it may be in a relatively solid position to face what may yet prove to be an uncertain period for UK-focused retailers.
Overall, its valuation could come under pressure if operating conditions worsen in the short run. However, its long track record of evolution, online presence and growing international operations suggest that it may be worthy of a wider premium versus its sector peers and when compared to FTSE 100 index peers.