ASOS: Investment mistake or absolute bargain?

As analysts slash forecasts and price targets, Graeme Evans picks through the mess left by a grim profits warning to see if the shares are now good value. 

The shockwaves from the pre-Christmas profits warning at AIM-listed retail heavyweight ASOS were still being felt today as brokers slashed as much as 65% from their previously lofty price targets.

Liberum, for example, has downgraded its investment rating on ASOS from 'buy' to 'hold' and cut its target to 2,800p, having earlier predicted that shares had the potential to reach a new record of 8,000p.

Barclays Capital is more optimistic and believes that the stock now looks undervalued after Monday's 37% slump, which was triggered by a significant deterioration in trading in the key Black Friday month of November.

The bank kept its 'overweight' investment rating but cut its price target to 4,000p from 7,500p previously. A number of other brokers also see recovery potential, helping shares rally by 4% today to 2,720p.

Source: TradingView (*) Past performance is not a guide to future performance

Despite yesterday's setback, ASOS's overall ambitions have not changed as part of a drive to become the world's "number one destination for fashion loving 20-somethings".  This involves reaching £4 billion of net sales, fuelled by an increase in annual capital expenditure to as much as £250 million.

Recent trading means this is being "re-phased" to £200 million in the current year, but with the company still expecting a return to cash inflows in 2020. 

Jefferies, which has cut all the way from 9,000p to 3,500p, believe ASOS will recover and that the business model is not broken.

Analyst Caroline Gulliver said:

"We expect ASOS to continue to lead the industry for technology and customer experience and at this level remain buyers."

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UBS is still reviewing its forecasts based on expectations that underlying earnings of £56 million for the 2019 financial year will now be some 55% short of its previous estimate of £125 million.

Whereas the new forecast from ASOS now points to annual sales growth of 15%, UBS had previously anticipated growth of 24.7%. A projected cut in the earnings before interest margin to a slender 2%, compares with the bank's 4.1% forecast.

ASOS blamed its recent woes on the high level of discounting and promotional activity across the market, coupled with unseasonably warm weather.

Sales growth in the UK was actually ahead of UBS expectations at 19%, but this was more than offset by margin pressure as the company reacted to weakening consumer confidence. Trading outside the UK was significantly below UBS forecasts.

Monday's share price slump leaves ASOS trading with a price/earnings (PE) multiple of 26.7x, having been on a projected PE above 70 earlier this year. Significantly, up-and-coming rival Boohoo.com is on 54.9x and has closed the market value gap, at £1.8 billion compared with £2.2 billion for ASOS.

Boohoo heightened the jitters around ASOS yesterday by announcing that its own trading performance remains strong, with record Black Friday sales. It continues to trade "comfortably" in line with expectations.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.