Shares are down from recent highs at HSBC Holdings (LSE: HSBA), Royal Dutch Shell (LSE: RDSB) and N Brown Group (LSE: BWNG) but the investment story remains compelling in each case. Are we seeing a good-value entry point for these shares right now?
A growing market
Plus-size clothing purveyor N Brown Group has several attractions. For example, the niche market of selling plus-size clothing, discretely, strikes me as likely to be buoyant and growing in todays world. Then theres the ongoing progress N Brown is making migrating sales from a catalogue-/post-based model to internet-driven revenue around 63% of the companys turnover arrives via the medium of the internet, and growing.
That story sounds compelling, and the shares enjoyed an upwards re-rating between early 2012 and early 2014 as the price-to-earnings (P/E) rating increased. However, despite revenues following a steady upwards slope for the last five years, earnings have been volatile, causing the shares to slide by just over 50% during 2014, touching 287p or so by October that year. Poor seasonal sales and ongoing re-structuring are to blame for the firms lacklustre performance on profits, but Im heartened by the steady progress on sales.
Shaking things up
N Brown is changing its business model, and progress with sales shows that the new way of doing business is working. However, shaking things up to accommodate change, and clearing away inefficient parts of business operations can generate exceptional costs, such as those recently incurred when the firm closed some clearance stores. One-off costs can muddy the waters for investors, and poor sales in a season due to weather effects dont help clarity either.
Since early September, the shares have recovered by more than 30%, which suggests that N Browns longer-term attractions are once again shining through. Indeed, City analysts following the firm expect earnings to recover by 20% year to Feb 2016 and by a further 10% the year after that. The share-price reversal is encouraging, and Im tempted to buy any retrace now, bearing in mind the solid progress the company continues to make with revenue-generation.
Todays 383p share price has the shares changing hands on a P/E multiple of just over 14 for the year to Feb 17, and theres a nice forward dividend yield of 3.9% with the payout covered 1.8 times by forward earnings.
What about the big firms?
Is FTSE 250 firm N Brown Group more attractive than bigger firms that have also seen there shares weaken during recent months and years, such as banking and financial operator HSBC Holdings and oil company Royal Dutch Shell? To me it is, even though HSBCs forward P/E rating of 10 and Royal Dutch Shells of 13 seem lower than N Browns rating.
All three of these firms have cyclicality in their business operations, but Id argue that Shells fortunes are out of its own control as commodity prices fluctuate according to the dynamics of world economies, and supply and demand. HSBC is what Id describe as a commodity-style business, because the firms banking and financial products are similar to those from other providers, and because the banks performance depends a great deal on what the economy is doing.
N Brown, though, provides a service with an element of repeat custom. Clothes wear out regardless of the depth of a recession, so even though business might wax and wane with the economy, the movement could be less extreme than the famine-and-feast dynamics faced by bankers and miners. N Browns ongoing re-invention as an internet operator combines with this insulation from the more severe effects of cyclicality to make the firm the most attractive. If any of these firms currently shows us a golden opportunity as an investment, its N Brown Group to my eyes.
N Brown Group is tempting, but even if I wanted to invest in a large-cap firm, I’d personally avoid HSBC Holdings and Royal Dutch Shell. It takes more than shear size to make an investment ‘safe’. There are better big-caps out there, such as those featured in a document prepared by our investment team about five superior large-cap firms. Each of these firms has a healthy balance sheet, a dominant market position, reliable cash flows, wide exposure to global markets and decent growth prospects.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
