Sir Terry Leahy, the former Tesco boss, is a fallen idol of the stock market.
Seven years ago, Leahy could do no wrong as Tesco continued to grow in the UK and around the world. All that anyone worried about back then was that no town in Britain would be Tesco-free, and that the behemoth would single-handedly crush the life out of the UK’s high streets.
But since Leahy departed in 2011, things have gone badly wrong. And he has to take at least some of the blame for Tesco’s troubles.
Now Leahy has returned to the stock market as the chairman of B&M, a fast-growing discount retailer.
Can Leahy redeem his reputation? And should you buy shares in the newly listed B&M?
B&M makes a good start – but is it good value?
B&M’s full name is B&M European Value Retail (LSE: BME), and the company owns over 370 discount stores around the UK. Unlike at Poundland (LSE: PLND), there are plenty of products where prices are more than a pound, but there is still a real emphasis on value.
B&M’s stores tend to be fairly large and sell a wide range of products, ranging from tea bags to TVs. The one big omission from the B&M product range is fresh food.
B&M’s management thinks there is plenty of scope for growth. Apparently two thirds of the British population still can’t easily access a B&M store, so the company reckons it could grow the chain to a size of around 850 shops in the UK.
And looking at it, I have to say that B&M is a pretty impressive business. Revenue is growing fast and there’s plenty of potential for future growth. And not just from opening extra stores.
Like-for-like sales at existing stores grew by 6% last year, and I think we could see further same-store growth in the future as more and more people get into the habit of visiting discount stores on a regular basis.
B&M has also bought a small discount retailer in Germany and hopes to grow that business too. So it’s a sensible business with good growth prospects, run by a retailer with a good – if tarnished – track record. That’s all very promising.
What really matters when buying any stock – the price
But what really matters is what we are being asked to pay for it. Is the company good value?
It listed on the stock market yesterday at 270p a share, and the closing share price last night was 285p, which values the company at £2.8bn.
And I’m afraid that valuation is just too rich.
You see, for the year to March, B&M’s total revenue was £1.27bn, which means that at £2.8bn, B&M is valued at more than twice its current sales. That’s a high valuation for any business, even one that is growing fast.
B&M also looks pricey on a price/earnings (p/e) basis. According to Reuters, the forward p/e ratio is 27. That’s not Asos territory, but it’s very high for a retailer.
You also have to remember that at least some of the analyst forecasts for B&M will have been made as part of the marketing process for the B&M float. In other words, some of these forecasts may prove to be optimistic.
So the true forward p/e ratio is probably even higher than 27.
I also think there’s a good chance that the B&M share price will fall below its initial public offering (IPO) price at some point in the next few months. That’s what’s happened with three other retail floats this year: Poundland (LSE: PLND), Pets at Home (LSE: PETS), and AO World (LSE: AO) - all three companies are now trading below their IPO price.
You get the feeling that lots of unlisted retail stocks are rushing to list right now before the stock market goes pop. It’s a great time for retail entrepreneurs and private equity firms to cash in their chips. Just make sure that you’re not the mug on the other side of that deal.
Are there any better alternatives?
If you’re patient, you may want to wait for a correction before you buy any retail shares. But if you’re determined to buy a retailer now, I’d point you to one of my old favourites, Next (LSE: NXT).
I’m happy to own shares, because the company has a long track record of success and continues to deliver strong performance quarter-after-quarter. On a p/e ratio of 17, it’s certainly not in bargain basement territory, but heck, it’s cheaper than B&M and it’s got a much surer track record.
I’m also going to keep an eye on Tesco (LSE: TSCO). With all its woes, I don’t think it’s good value at the current price of 292p, but if the price falls some more, there may come a time when I think it’s worth buying. Perhaps next year. (My colleague Bengt Saelensminde is a bit more optimistic than me – you can read his take on Tesco here.)
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