RE: ennombrede11 Oct 2014 13:36
Thanks. Asos is a great business, and we’d agree, has a good fan base in its targeted age range, loyally returning to the site for repeat purchasing. Its technology, functionality and execution have meant its powered ahead taking sales away from others over the past decade. Its valuation has always seemed ‘expensive’ to many during its run-up, but operating momentum just deservedly carried the sp to greater heights. In fact I myself attempted a short in the 60s early this year, thinking too much was baked in and operationally things were changing, but the stock refused to be taken down at the time.
The valuation argument I’d propose is still an issue in regard to a potential trade (or even a bigger issue to non-trade) acquirer. Asos is not generating much free cashflow, making an acquisition at the usual premium of say around 40% earnings depleting, with the cash generated being less than the cost of capital.
Growth has slowed, which on forecasts makes the PEG (P/E divided by Growth Rate) soar from what has been reasonable before when the company was growing quickly. The PEG currently is a stand out record multiple in Asos’ history. If we can assume around a 10% EPS growth in FY15, it’s a PEG of about 5x.
To an acquirer the valuation only makes sense if sufficient strategic or synergistic arguments can call for such a price tag. Let’s face it we’re looking at a price tag that would be well north of $4bn.
Amazon, rumoured as a potential predator however is one of the very few that can be justified. Everyone knows Bezos is not your average CEO, and that the company is focussed on tomorrow, growing its sales and capturing market share but not generating any cash at the moment. Its investors are happy with that.
Some argue AMZN shares are extremely expensive (which it may well turn out to be) but one must recognise how the model is currently operating, with one analyst describing the company’s inherent ability to turn on the earnings switch soon. On a Price to Sales measure AMZN’s valuation of around 1.6x Forecast Sales, is not that different to ASC of about the same, maybe a tad higher. Ironically because of the profitability nature of the two at the moment, Amazon could (instead of using cash) issue shares in an all-share offer to ASC shareholders and it would still be earnings enhancing. However, that is to miss the point of what the acquirer would be looking for. Does ASC really offer AMZN something? I cant say I understand the two businesses well enough. What I can say, is that AMZN is one of very few companies that could actually conduct an acquisition of ASC and it not lead to immediate downgrades of EPS. Without predators though, ASC as a standalone business requires a higher growth rate (downgrade revisions currently), or lower a Price/Earnings multiple (lower sp), in order to call the sp as attractive to prospective investors who have a pool of other investment choices. Its
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