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Next’s (LSE: NXT) share price is on a roll. Its Q3 trading update on 30 October was another in a string of powerful recent results, and the market responded in kind. The share price is now hovering near an all-time high.
That is not surprising, as the numbers looked excellent to me. But it does raise a key question: has the price run ahead of the company’s true worth?
I dug into the business and ran the key numbers to find out.
A reshaped core business
I think the key to Next’s ongoing success has been its transformation into a multi-channel, multi-brand platform.
A key component of this is the Next Platform that includes other firms’ products as well as its own. By the time of its 27 March 2024/25 results, 42% of its UK online sales were not Next-branded items. That shift helped push profit before tax past £1bn for the first time.
Another primary element has been tapping into overseas third-party distribution networks, allowing for growth beyond its own infrastructure constraints. By using these, Next has grown international online sales by 350% over the past decade.
But the stock is not without risk. The main one I see is that the brutally competitive retail sector could squeeze its profit margins over time.
Strong Q3 numbers
Still, the latest numbers were impressive.
Sales jumped 10.5% year on year, ahead of its previous guidance for the period of a 4.5% rise.
As a result, the firm increased its Q4 sales guidance from 4.5% to 7%. This would add a further £36m to its previous sales projection.
This, together with its Q3 sales rise, also led it to increase its full-year guidance for profit before tax by £30m, to £1.135bn.
Is the share price too high?
A company’s share price is just what people are willing to pay. Its value, though, is what the business is actually worth based on business fundamentals.
So, what is the best way I have found to discern the difference between the two?
While it is tempting to compare one stock to others in the sector on various ratios, I think it can be misleading.
If an entire business sector’s stocks are overvalued, then a relative undervaluation in one of them can be meaningless. It might simply show that the stock in question is less overvalued than its peers.
To cut to the chase, I primarily use the discounted cash flow (DCF) model. I have found it to be the best tool for identifying ‘fair value’, as it is based on future cash flows and earnings growth.
The result? At their current price of £145.43, Next shares look 17% overvalued. So, their fair value is £124.30.
My investment view
Next’s current overvaluation does not mean that it is not a great company – I think it is.
It also does not mean that it will not continue to grow – I think it will do that too. Indeed, consensus analysts’ forecasts are that its earnings will increase by a yearly average of 6% to end-2027/2028.
However, right now, its price appears to be trading above what its value justifies.
And I think there are many other high-quality — but also highly undervalued — stocks out there that are worth considering first.
