Strong Q3 results — but is £145+ too much for Next’s share price?

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Next’s (LSE: NXT) share price is on a roll. Its Q3 trading update on 30 October was another in a string of powerful recent results, and the market responded in kind. The share price is now hovering near an all-time high.

That is not surprising, as the numbers looked excellent to me. But it does raise a key question: has the price run ahead of the company’s true worth?

I dug into the business and ran the key numbers to find out.

A reshaped core business

I think the key to Next’s ongoing success has been its transformation into a multi-channel, multi-brand platform.

A key component of this is the Next Platform that includes other firms’ products as well as its own. By the time of its 27 March 2024/25 results, 42% of its UK online sales were not Next-branded items. That shift helped push profit before tax past £1bn for the first time.

Another primary element has been tapping into overseas third-party distribution networks, allowing for growth beyond its own infrastructure constraints. By using these, Next has grown international online sales by 350% over the past decade.

But the stock is not without risk. The main one I see is that the brutally competitive retail sector could squeeze its profit margins over time.

Strong Q3 numbers

Still, the latest numbers were impressive.

Sales jumped 10.5% year on year, ahead of its previous guidance for the period of a 4.5% rise.

As a result, the firm increased its Q4 sales guidance from 4.5% to 7%. This would add a further £36m to its previous sales projection.

This, together with its Q3 sales rise, also led it to increase its full-year guidance for profit before tax by £30m, to £1.135bn.

Is the share price too high?

A company’s share price is just what people are willing to pay. Its value, though, is what the business is actually worth based on business fundamentals.

So, what is the best way I have found to discern the difference between the two?

While it is tempting to compare one stock to others in the sector on various ratios, I think it can be misleading.

If an entire business sector’s stocks are overvalued, then a relative undervaluation in one of them can be meaningless. It might simply show that the stock in question is less overvalued than its peers.

To cut to the chase, I primarily use the discounted cash flow (DCF) model. I have found it to be the best tool for identifying ‘fair value’, as it is based on future cash flows and earnings growth.

The result? At their current price of £145.43, Next shares look 17% overvalued. So, their fair value is £124.30.

My investment view

Next’s current overvaluation does not mean that it is not a great company – I think it is.

It also does not mean that it will not continue to grow – I think it will do that too. Indeed, consensus analysts’ forecasts are that its earnings will increase by a yearly average of 6% to end-2027/2028.

However, right now, its price appears to be trading above what its value justifies.

And I think there are many other high-quality — but also highly undervalued — stocks out there that are worth considering first.

The post Strong Q3 results — but is £145+ too much for Next’s share price? appeared first on The Motley Fool UK.

More reading

• Here’s why the Next share price climbed another 15% in October
• Up 17% in October – is this unsung FTSE hero among the best stocks to buy in November?
• The Next share price rises 6% as the retailer announces a special dividend

Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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