Shares in online furniture retailer Temple & Webster Group Ltd (ASX: TPW) have been hammered recently.
Even before the vaccine announcement last week, many other ASX retail shares such as Nick Scali Limited (ASX: NCK) and Redbubble Ltd (ASX: RBL) all seemed to fall off a cliff at the same time following a staggering run since March.
Temple & Webster shares may be heavily discounted, but I think it’s important to try and get a realistic sense of overall value, regardless of the price shares were trading at a few weeks ago.
Quick background of Temple & Webster
Temple & Webster is an online furniture and homeware retailer with over 180,000 products on sale from hundreds of suppliers.
The company’s income statement fits that perfect “staircase” shape, with revenue, net income, and net margins growing consistently every year since 2015.
As you can see from the chart below, this company has been a real winner from the COVID-19 pandemic.
TPW share price chart
You can learn more about Temple & Webster’s business model and growth prospects in this article: How I analyse Temple & Webster shares
My latest thoughts on Temple & Webster shares
There’s no denying here that Temple & Webster is a well-run company, but to me, the valuation still has to make sense for it to be an attractive investment in my eyes. Even after these pullbacks in the share price, the company trades on a P/E ratio of 86x FY20 earnings.
Given how Temple & Webster has performed and rewarded its shareholders recently, I would argue that this price tag is fully justified even at those levels.
Despite this, what’s important to determine is this: regardless of how the company has performed in the past, is the current share price reflective of its future earnings growth?
I think that in order to justify this current P/E ratio now, the company would have to continue to deliver this record growth we’ve seen over the last 8 months. This might be possible or it might not, I just try to avoid situations where there appears to be an asymmetrical return with more downside than upside.
Some analysts are predicting FY21 earnings of $24 million (73% increase on FY20 earnings). If this is achieved, and assuming the same share price, this still puts the company on a forward P/E of around 50.
Summary
This isn’t a criticism of the company itself, I’m just struggling to get my head around the valuation.
If you’re looking for retail exposure, I’m really liking Accent Group Ltd (ASX: AX1) shares at the moment. This company has also done extremely well for its shareholders and has achieved compound earnings per share (EPS) growth of 12.3% and an annualised return to shareholders of 20.4% over the past 10 years. The valuation also isn’t eye-watering, with a somewhat more sensible trailing P/E of 16.2.
If you want to know more, you should read my detailed analysis of Accent Group shares here.
