LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.
Right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index.
I hope to pinpoint the very best buying opportunities in today's uncertain market, as well as highlight those shares I feel you should hold… and those I feel you should sell!
I'm assessing every share on five different measures. Here's what I'm looking for in each company:
- Financial strength: low levels of debt and other liabilities;
- Profitability: consistent earnings and high profit margins;
- Management: competent executives creating shareholder value;
- Long-term prospects: a solid competitive position and respectable growth prospects, and;
- Valuation: an underrated share price.
A look at Next
Today I'm evaluating Next
1. Financial strength: Next has significant gearing of 334% with net debt at 574 million pounds, but it remains financially strong with interest cover a hefty 21 times and robust cash flow from operations, which has averaged around 550 million pounds for 10 years.
2. Profitability: Next has performed remarkably well this past decade, increasing sales and profits every year, except during the global financial crisis of 2008. Sales have grown at a modest rate of 5% annually, but earnings per share and free cash flow have compounded by 15% per year, enhanced by share buybacks and expanding operating margins from 14% to 17%. The company has been a model of business efficiency producing extraordinary returns on equity (ROE) and returns on capital employed (ROCE), averaging 159% and 72%, respectively, for a decade.
3. Management: Credit should be given to Next's management for delivering exceptional results in a highly competitive sector and for continuing to perform well despite the tough economic environment of the last few years. Also, it has been the company's practice to give back surplus cash to shareholders, returning a total of 3.2 billion pounds over the last 10 years in dividends and share repurchases.
4. Long-term prospects: Next has over 500 stores in the U.K. and Eire and 200 franchised stores worldwide. The majority of its retail space is extremely profitable, and the group sees a lot more opportunities for profitable expansion within the U.K. The company's shopping catalog and website, Next Directory, has been a major driver of its success and now contributes about 31% of the group's sales and 43% of its profits. It has around three million active customers and will be available in 61 countries by the end of 2012.
5. Valuation: Based on the latest company guidance, earnings per share is expected to be around 280 pence and dividends per share around 100 pence for the year, which would give Next a not-so-cheap forward price-to-earnings ratio of 13 and a modest dividend yield of 3%.
My verdict on Next
Next's performance this past decade has been extraordinary and it is not a surprise its shares have performed extremely well -- compounding by an annual rate of 17%. It is a well-managed company that has consistently produced strong profits and cash flows. However, at 13 times forecast earnings, I think it is already reasonably priced and does not provide a sufficient margin of safety in case of adverse events or if business conditions become less than ideal. Especially given the tough competition in the retail sector and the company's huge debt load, things could deteriorate quickly.
So, overall, I believe Next at 3,599 pence looks like a hold.
More FTSE opportunities
Although I feel Next is a hold right now, I am more positive on the blue chips highlighted in "The Market's Top Sectors." This special report sees three Motley Fool Share Advisor analysts each studying a favorable industry -- and spotlighting a particular share to consider for this year and beyond.
Various opportunities are covered in the report. One might provide "solid returns and... nice dividends," another could offer "global diversification and long-term growth potential," while a third looks a "high-quality business" from a battered sector.
You can read "The Market's Top Sectors" today by requesting the report for free. But hurry, the report is available for a limited time only.
In the meantime, please stay tuned for my next verdict on a FTSE 100 share.