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Some folks think that I am the lackey of bear raider Evil Knievil, writing to order to suit his needs. Au contraire. He does not work for me and vice versa and given how insufferable the old boy can be when he gets it right, I – like many – take a perverse pleasure when one of his short positions sees his financial toes roasted close to the fire. And online retail giant ASOS (LSE:ASC) has roasted Evil badly over the years. He has been short for much of its meteoric rise and he is still short with the shares at 3,334p – he will carry on getting burned.
I write this totally objective comment on ASOS even though it uses as its PR firm College Group which I appear to be having a bit of a battle with as of this afternoon. To read about Kay Larsen PR prude at College Group PR, Pornography, Cheryl Cole, sheep shagging and Advanced Computer Software click HERE
Moving on from the prude to the bear. Cawkwell (that is to say Evil Knievil) has always been of the view that ASOS shares trade on too high a PE because at some stage the earnings growth rate will slip. So far it has not happened and I guess it will have cost him several hundreds of thousands of pounds. It will cost him more.
I explained the Cawkwell bear case in full and why it was wrong a few months ago HERE
Last week ASOS published retail sales numbers for Q2 (December-February) which at +37% were better than forecasts. The crumb of comfort for Cawkwell was that December was +41% so January and February were lower but not by much. Gross margins were 50 basis points down but before Evil gets too excited this was mainly due to the ASOS own brand re-pricing exercise which will annualise fully in May. And Management (which has always guided accurately to date) says that full year gross margins will actually improve which implies an upswing of 120 basis points in the second half. Management insists that full year results will be in line with expectations.
On that basis I’d expect year to August 31 2013 pre-tax profits of £50.7 million (up from £44.7 million) rising to £65.9 million next year. That equates to 2013 earnings per share of 45.2p (up from 39.6p) with 59p on the cards for next year. Net cash should be £47 million by this year and £81 million 12 months later.
Now you might say that a 2014 (only six months away) PE of 56 looks full. In abstract it does but given the rate of earnings growth I would suggest that it does not. In 2015 earnings per share should be well north of 70p and suddenly that PE starts to fall to the mid-thirties for a company that is more than capable of delivering near 30% earnings growth. The PEG is not demanding. I note that brokers seem to agree. Panmure Gordon sets a target price of 4,000p but extrapolating out to 2019 its “blue sky” model sets a 6,600 target price.
I am not so sure about 2019 extrapolations. I accept that if ASOS saw a drop on sales growth its shares could crater. But there is no sign of that at all. And as such the longer Evil stays short the more money he will lose. It is that simple.
Tom Winnifrith takes orders from no-one and writes exactly what he thinks for 10 US and UK websites. You can get links to all his content by following him on twitter @tomwinnifrith or by following the links on his own website www.TomWinnifrith.com
Tom, you doth appear to protest too much. Continue to take his money under the table and be proud.
What with Ruspetro (Long) and ASOS ( short) not sure Cawky has any cash to hand over. But for the avoidance od doubt while I have historically used him to do my tax returns ( don’t tell him but I will be firing him for 2012/13) EK has never paid me a cent for anything…
nucking fumpty twot wankipoo