Next shares worth £100

Next has been one of the stockmarket's true stars in recent years. Despite the odd weather warning, pre-tax profit has risen by over £250 million since 2011, earnings per share (EPS) have doubled, and the share price has risen fourfold. There has been plenty of comment on the way up, including from us, questioning whether Next could justify gains. But we noted in March that investors were "keen to buy on the dips", and they did. Now, analysts at Barclays think the shares could hit three figures.

"Our analysis suggests the market underappreciates Next's growth opportunities both in Retail and Directory which stem from real wage growth, a very promising Label business and online international expansion," writes analyst Christodoulos Chaviaras.

"Through an efficient and well invested operational model Next can benefit from a positive UK macro environment while incurring minimum capex, which justifies a sector premium valuation in our view."

And after a decade of negative Retail like-for-like (LFL) sales, the broker is optimistic that real wage growth and steady UK consumer improvements will mean Next Retail can sustain a positive LFL performance. Barclays looks for Retail LFLs up 1.5% from flat in the next three years.

At £74.75, Next trades on 16 times earnings estimates for calendar year 2016. After upgrading forecasts, Barclays now expects EPS of 436p for the year to January 2016 and 482p for the following 12 months. That multiple is in line with the sector, but near its lowest level in two years.

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"This is partly explained by a temporary (in our view) stall in earnings," says Chaviaras. "Given the UK consumer continues to improve, real wage growth is a reality and Next has been off to a good start in the year, despite maintaining conservative guidance, we see scope for earnings momentum to pick up and the shares to rerate."

The broker estimates a three-year EPS compound annual growth rate (CAGR) of 8.5% and a dividend yield above 5%. If, as Barclays anticipates, Next's directory business makes more than the Retail operation this year (Jan 2016), the shares should trade at a premium to peers.

Label, which offers new premium non-competing brands, will be a key driver for Next Directory. Launched in March 2014, Barclays thinks it will generate annual top line growth of 40% per annum over the next five years, so that by 2020 sales are close to £600 million - the entire Directory business turned over £1.5 billion last year. It's why Barclays estimates Label is worth close to £2 billion, "although the market barely assigns a value for it currently".

"We conclude that Next offers income, growth, stability and visibility at a good price," argues Chaviaras, who upgrades Next from 'equalweight' to 'overweight' and lifts the price target from 7,400p to 9,000p.

"If real wage growth in the UK has a greater effect than we anticipate on Retail LFLs and Next can sustain above 2% store LFLs then our upside case would add £10 to our target price." That would get Next up to the £100 mark.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.