This post formed the basis of an article which then appeared in the Australian Financial Review on 30 November 2016. Michael Gable is a regular expert contributor to the AFR. You can access the AFR version HERE.
Premier Investments operate a number of fashion chains in Australia with brands such as Just Jeans, Portmans, and Dotti. Although these brands are mature, it is the new store roll-out of brands such as Smiggles and Peter Alexander which have caught the attention of investors and are driving the earnings higher. When Solomon Lew hired Mark McInnes 4 years ago, the share price was under $7. Earlier this year it peaked at over $17. The stock has since fallen and is now trading under $14, so is this an opportunity to buy into Premier Investments?
The challenge is the mature brands which on average are experiencing low single digit sales growth. The main opportunity though is in Smiggles which is expanding in the UK. Sales revenue increased last year by over 40 per cent. Taking away new store roll-outs, we estimate that like for like sales are over 10 per cent. With Peter Alexander, we are saw sales increase by over 20 per cent in the last year and like for like sales are estimated at 8 per cent. The company is now trading on a forward P/E of under 19x, which is cheap if consensus targets are met.
We got our clients out in March this year when the shares were too expensive, but now the chart is telling us it is time to buy back in. When it spiked up in March, the stock became very overbought on our momentum indicators and it was at risk of falling. What is interesting to see is that the rally in March saw the stock gain over $4 in about 1 month to hit its yearly high. For the stock to drop $4 and head back to the same levels, it has taken the market about 8 months to push it lower. If a stock needs 8 months to overcome a 1 month rally, then this means that there is a lack of selling pressure. That is, we are seeing quick moves up, but slow moves back down. We have also seen the stock pullback in 3 waves to find support on the uptrend line. With a couple of large brokers recently upgrading their recommendations on Premier Investments, this tells us that we have good support here and we can feel comfortable in buying the stock in anticipation of rally.
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