[VIDEO ANALYSIS] Is Next DC another high PE stock to avoid?

William O'Loughlin:

Okay, so the next question is from Peter, from New South Wales. Can you please give your thoughts on NEXT DC, NXT, and Bapcor   , BAP. These are two completely different companies. They're not related in any way. I'll start with NEXT DC. This is a data centre as a service company, so effectively, they're renting or leasing access to a data centre. This allows companies to use a data centre without having to build one themselves, so it can work out as a cheaper option.

 

 

Just looking at some of their financials, their operating cashflow of 20 million is relatively strong. They were profitable for the half-year ended 31st of December, but having said this, these numbers give a trailing P/E of around 62 times. This is one of those very high P/E growth stocks, so basically, the share market is pricing this stock assuming that it's going to get excellent growth for the next few years. Personally, I don't really like these kind of stocks. Basically any hiccup in the financial results can be disastrous for the shareholders and we've seen plenty of examples of that recently. Other companies we've talked about like Bellamy's, Blackmores,  Sirtex, they've all been in a similar situation to this, where they've been trading on very high P/Es, the market's pricing in a lot of growth, and it can happen that they still get growth, they still get positive numbers, but if it's not what the market was expecting, the share price can still drop.

 

Shannon Rivkin:

I was going to jump in and say I think Domino's is the perfect example of one that, at the interim profit, they actually uprated profit expectations once again, but the market had gotten well ahead of itself, and despite that, it actually fell. As you're right, and I do think as well, right now we're seeing a little bit of a theme of unwinding of those high growth stocks and the P/Es and a little bit of the blue chips and then the high quality but lower growth ones are coming back into favour.

 

William O'Loughlin:

Yeah, so in the case of this company, I do like the idea of data centre as a service and I think they will get growth there, but I just don't like buying these companies at such high P/Es. They're expensive in my view.

The next company mentioned was Bapcor. They're in distribution of automotive after-market parts. They've had strong revenue and profit growth in all three of their segments, being trade, retail, and specialist wholesale. They're priced for growth as well to a certain degree, but it's not the same degree as NEXT DC. They're forecasting net profit for FY17 of between 57 and 59 million, and that's on a market cap of 1.5 billion. It is a high-ish P/E, but it's not outrageous. Yeah.

 

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