Wednesday tips round-up: Asos, Thomas Cook

17th Sep 2014 09:04

Shares of Asos have been brought down to earth this year as reality set in. They have crashed from 70 pounds at their height to just 22.07 pounds yesterday, following another profit warning.The company is fundamentally sound, like its business model, but it operates in a highly competitive market. For starters, spending by consumers cannot grow much more than the UK economy. Even so, its sales grew at a 33% clip in the last quarter of its financial year, while those of recently floated rival boohoo.com did so by 31%. Such growth has to come at the expense of someone. Foreign sales, meanwhile, came under pressure from weak growth and a strong pound. That meant it had to discount heavily overseas at the same time that it invests in infrastructure to expand in other geographies.Unsurprisingly, its margins are now expected to come in at between 4% to 6% over the next five years, versus an historic 7% to 8%. Furthermore, while the online fashion retailer is confident that it can hit its 2.5bn pound target it is not saying when. At 50 times´ earnings there seems to be little reason for the stock to resume its upwards trajectory now. “It is still hard to justify the sky-high rating,” writes The Times´s Tempus.Travel tour operator Thomas Cook was forced to cut the prices of its package holidays, the company said in a trading statement, due to overcapacity in the sector. That means that its full-year profit forecasts will come in at the lower end of expectations. Most worrying however is the possibility that said overcapacity might spill over into next year. The transformation of the company under new chief executive Harriet Green has been impressive. The firm has slashed at its unwieldy cost base – due to what was a costly high-street presence – and a 1.6bn pound capital increase means that its balance sheet is now on an even keel.Cost savings are still going according to plan but the aforementioned overcapacity means that margins are at risk. Hence, the firm may not meet investors´expectations, which are already in the price. Analysts, for example, currently expect pre-tax profits to jump by 51% to 282m pounds next year. At eight times next year´s earnings the stock still looks cheap but the recovery in profits looks a bit of a stretch. Hence, The Daily Telegraph´s Questor column has downgraded the shares to ´sell´.